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Apr 19, 2023 13 tweets 4 min read Read on X
Investors prefer liquid funds for building an emergency corpus.

Now that the taxation of debt funds has changed, investors are looking for alternatives.

One option is Arbitrage funds. They offer a #tax advantage.

We compare both categories to see which is better.

A thread 🧵 Image
Let’s start with the basics: What are Arbitrage Funds?

These are part of the hybrid fund category and invest in arbitrage opportunities.

They follow complex methods.

But to understand the concept, let’s look at a simple example. 👇
Say #Infosys is trading at a higher price on #NSE compared to BSE.

So, the fund manager buys Infosys on BSE and sells on NSE simultaneously.

Usually, these funds look for mispricing opportunities in the ‘Cash’ and the ‘Futures & Options' markets.
Risk is limited in these funds.

Reason: Fund managers don’t invest in equities directly but only in different arbitrage opportunities

Therefore, the chances of Arbitrage Funds delivering negative funds are rare.
One data point to put things in perspective.

Never have any arbitrage fund delivered negative return over a 6-month period in the last 3 years (See graph) Image
Now, let’s look at Liquid funds.

These schemes invest in short-term debt papers maturing within 91 days.

Thus, they are among the least risky debt funds.

They have some credit risk, that is, the company in which the mutual fund has invested defaults.
SEBI has, however, changed norms in the past few years to protect them from credit risks.

This can be seen by the fact that hardly any liquid fund has delivered a negative return over 6 month period (See graph) Image
In terms of risk, both categories look similar.

What about returns?

As the average returns of all funds may look diluted, we did something different.

We took the average of the top 5 performing funds in each year to evaluate the categories. Image
Takeaway:

Liquid Funds have performed better, but the differential isn’t much.

Plus, Arbitrage Funds have a tax advantage, especially for those in the 20% and 30% tax brackets.

The post-tax return, therefore, would be better for Arbitrage funds.

Let’s see how they are taxed👇
Arbitrage funds are taxed like equity.

Therefore, short-term gains (less than a year) are taxed at 15%.

Long-term gains (after a year) above Rs 1 lakh are taxed at 10%

No tax is levied on gains up to Rs 1 lakh.
After the change in debt funds’ taxation, any gains will be added to an investor’s income and taxed as per the slab.

The following table shows how the post-tax return of these two categories of funds may look like based on historical data. Image
Arbitrage funds have the potential to deliver better post-tax returns than Liquid funds.

You can park some portion of your emergency funds in Arbitrage funds with other options, such as fixed deposits.
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More from @ETMONEY

Apr 7
Nifty 500 crashed 3.42% today.

But this isn’t new.

Markets have tanked as much as 13% in a day.

And they’ve always bounced back — sometimes in less than a month.

But here’s the interesting part: SIPs recover even faster. A🧵 Image
We analysed past market crashes using the Nifty 500 index.

For each crash, we looked at:

1. How long the market took to recover
2. How long an SIP took to recover

We assumed a monthly SIP of ₹5,000 starting 3 years before the crash.

The idea was to check how quickly the SIP recouped its losses.
Let's start with the 2020 Covid crash.

Nifty 500 fell 38% and took 7 months to bounce back.

But a SIP started in 2017? It rebounded in just 4 months.

And this isn’t a one-off event. Image
Read 8 tweets
Apr 5
233 stocks from BSE 500 have fallen over 20% since Sept 2024.

How do you pick the best quality stocks trading at reasonable valuations after correction?

Here’s a 9-step framework to separate gems from traps. A 🧵

Using this, we got a list of 15 stocks (covered in tweet 14).
What is this framework?

We tested companies on 9 metrics related to profitability, leverage, liquidity, and efficiency. (See image)

Now, this isn’t just any checklist.

Known as Piotroski F-Score, it is a proven framework by Prof. Joseph Piotroski. Image
How does this work?

Each company gets 1 point for every metric it passes.

We tested all BSE 500 companies on 9 metrics & added up the scores.

So, scores can range from 0-9.

We filtered out stocks, scoring seven or more to find the strong ones.

But we added a twist to it.
Read 17 tweets
Apr 2
Your HR will soon ask: Old Regime or New Regime?

After Budget 2025, the New Regime looks like the obvious choice.

However, for some taxpayers, the Old Regime can still make sense.

How will you decide? Let’s break it down. 🧵
Let’s start with how both these tax regimes work.

Old Regime

It allows you to lower your taxable income through various deductions (PPF, ELSS, NPS, etc.) and exemptions (HRA, LTA, etc).

Let’s understand this with an example.
Say, your income is Rs 10 lakh.

Assume total deductions and exemptions you can claim = Rs 2 lakh

Your taxable income = Rs 8 lakh

This ₹8 lakh isn’t taxed at one flat rate. It’s broken into parts, and different portions of income are taxed at different slab rates. 👇 Image
Read 15 tweets
Mar 31
The Nifty Smallcap 250 Index fell 12.64% in February.

But your SIP returns (XIRR) might show a shocking -80%.

Does that mean your ₹10,000 SIP investment is now worth just ₹2,000?

No!

Then why does XIRR show such a big drop? Let’s break it down. 🧵
In SIPs, each instalment is invested on a different date.

So, some investments get more time to grow, and some get relatively less time.

Since the time of investment varies, simple return calculations don’t give an accurate picture.

That’s where XIRR comes in.
XIRR treats every SIP contribution as a separate investment.

And shows the average of how each SIP instalment grew every year.

This makes it the correct method to measure SIP performance over the long term.
Read 13 tweets
Mar 29
Last 1-year returns:

Nifty Smallcap 250: 6.5%
Tata Small Cap: 15%

This outperformance isn’t a one-off.

The fund has consistently beaten the index as well as its category average.

Its biggest strength? It protects your returns when markets fall.

A 🧵 on its investment strategy.Image
1. Focus on minimising losses

Corrections in small caps can be brutal. But this fund has handled them effectively.

Since its inception, Nifty Smallcap 250 has had 29 negative months. Tata Small Cap outperformed in 26.

In 10 months, when the index fell more than 5%, it did better in 9.Image
This solid downside protection isn’t by chance.

In a recent interview, Fund Manager Chandraprakash Padiyar highlighted that they look for companies that are reasonably priced, can scale consistently, are debt-free, and generate strong free cash flow.
Read 11 tweets
Mar 26
A simple hack before Mar 31 can help you save tax on the gains you made from stocks and equity funds.

Here’s what you can do:

- Sell your investments
- Book profits & losses
- Repurchase immediately

This is called ‘Tax Harvesting’. Let’s see how it works.

A 🧵
A few basics before we jump to tax harvesting strategy

Your profits from equities are divided into two buckets:

1. Short term: If you sell within one year (of purchase)
2. Long-term: If you sell after one year Image
How to Reduce Taxes?

You pay LTCG tax only when your gains exceed ₹1.25 lakh.

So, the trick is not to let your gains go beyond this tax-free limit.

How to do it? Sell a part of your gains to book LTCG and reinvest it.

Let’s check an example. 👇
Read 12 tweets

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