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Question: Kindly suggest if arbitrage funds are ok for earning high returns with low risk.

Answer: Don't be under the wrong impression that arbitrage funds are equity funds, which will give you high returns and also protect your downside.

Arbitrage funds are a unique fund in the sense that:
As far as the risk profile and returns are concerned, they are like a debt fund i.e. low risk and low returns.
However, as far as the tax laws are concerned they are treated on par with equity funds and as such the long term capital gains tax is nil (however note that a few arbitrage funds have a debt structure and will be taxed as debt funds).

Therefore, with arbitrage funds you can expect 6-9% p.a. returns like any debt fund. But the advantage is that here the tax could be less, thus improving your post-tax returns.

However, a small drawback with these funds is the redemption ? it is not possible redeem them as and when you want, but only on the last Thursday of the month.



Category Mutual Funds Interview Questions & Answers - Exam Mode / Learning Mode
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Question: Kindly suggest if arbitrage funds are ok for earning high returns with low risk.
Answer:

Don't be under the wrong impression that arbitrage funds are equity funds, which will give you high returns and also protect your downside.

Arbitrage funds are a unique fund in the sense that:
As far as the risk profile and returns are concerned, they are like a debt fund i.e. low risk and low returns.
However, as far as the tax laws are concerned they are treated on par with equity funds and as such the long term capital gains tax is nil (however note that a few arbitrage funds have a debt structure and will be taxed as debt funds).

Therefore, with arbitrage funds you can expect 6-9% p.a. returns like any debt fund. But the advantage is that here the tax could be less, thus improving your post-tax returns.

However, a small drawback with these funds is the redemption ? it is not possible redeem them as and when you want, but only on the last Thursday of the month. Source: CoolInterview.com



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