Is it advisable for a retiree to invest in an arbitrage fund?
- Satish
Arbitrage funds have come to the forefront because the market became very turbulent and arbitrage opportunities did exist. The charm of an arbitrage fund is that for a holding period of one year, it gives you the treatment of equity funds, which is no longer as beneficial as it used to be, given the long-term capital gains tax on equity now. But I would say that most investors can do without investing in an arbitrage fund.
Recently, it looked as if some arbitrage funds were giving better returns than fixed-income funds, with an added advantage of being treated as an equity investment for your investment of one year and more. Nevertheless, I would say that short-duration-debt funds can actually fulfil a retiree's needs better. Also, even if you're a long-term fixed-income investor and want your money to be invested conservatively, then short-duration funds are relatively more stable.
Of course, arbitrage funds are pretty safe in the sense that they don't take equity risk as they are structured and designed in that manner. But there are times when arbitrage opportunities don't exist in a range-bound market. There were situations in the past when arbitrage funds got classified and had to conduct like a liquid fund. So, the fallback of the arbitrage fund is that they will turn into a debt fund if they don't find enough arbitrage opportunities. So, I would say that keep it simple. For a large part of your money, don't try to get tactical and optimise your return with such funds. Having said that, a small part of your money can definitely be invested in arbitrage funds in the short term.
