I have ₹11 lakh to invest in a safe instrument for five to seven years. I am considering investing in arbitrage funds or debt mutual funds. Can you tell me the pros and cons of both?
- Misra
Arbitrage funds look to exploit the price difference between the cash and derivative markets to generate returns. Though they do not invest directly in equity, they are treated as equity funds for taxation purpose. This is their main advantage. If you hold on to your investments for more than 12 months, your investments will qualify for long-term capital gains tax. Long term capital gains tax is nil on equity investments held over 12 months.
Debt mutual funds invest in fixed income securities like bonds and treasury bills. Since you are investing with a long investment horizon, you can invest in dynamic bond funds. Investors in long-term debt funds are required to take a call on interest rate movements. Many regular investors would find it difficult to do it. That is why we normally suggest dynamic bond funds to long-term debt investors. The fund manager in these funds will take a call on interest rates and manages investments accordingly. If investments in debt mutual funds are sold after three years, they qualify for long-term capital gains tax of 20 per cent with indexation benefit.
This article was originally published on January 08, 2016.
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