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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

Mar 13
Are markets still overvalued?

Sensex is down 13.6% since it hit an all-time high in Sep 2024.

The pain is worse in mid and small caps:
BSE Midcap: -21.4%
BSE Smallcap: -24.2%

Despite such a steep correction, markets are still not fairly valued, as per long-term data.

A🧵
To answer that, we'll analyse 4 key valuation metrics:

1. Price-to-Book (P/B) Ratio
2. Cyclically Adjusted P/E (CAPE) Ratio
3. Market Cap to GDP Ratio
4. Bond Equity Earnings Yield (BEER) Ratio

Let’s start.
1. PRICE TO BOOK RATIO

The P/B ratio compares a company's (or index's) market cap to its book value (net assets).

The lower the P/B, the cheaper the market.

So how do large, mid, and small caps look now after the recent correction?
Read 17 tweets
Mar 8
Mid-cap & small-cap stocks have seen massive corrections.

Will PPFAS MF use this opportunity to increase allocation in them?

In a recent call, the fund house addressed this question.

It also shared many more insights, which can help you in your investing journey.

A 🧵
Will PPFAS Flexi Cap increase mid- and small-cap exposure now?

The fund house is exploring opportunities but is still cautious.

Since 2017, they’ve kept mid- and small-cap exposure below 20%.

By Dec 2024, small-cap allocation had fallen to just 2.81%.
With the recent correction, they are now exploring options again.

But they still don’t think valuations have hit rock bottom.

So, they’ll be very selective while investing in this space.
Read 13 tweets
Mar 4
Market realities are changing.

What are the trends you should watch out for?

A 🧵 on 5 trends that smart investors are tracking (that you might be missing). 👇
1. Small caps appear to be in the worst shape

Markets have been weak, but the real pain is in small-cap stocks.

Check how different indices have fallen from their peak in Sep 2024:

Nifty 100: 17.4%

Nifty Smallcap 250: 26.14%

The answer to this is in their earnings.
In Oct-Dec quarter of FY25, large-cap stocks managed 6.5% revenue growth compared to last year.

Mid-caps did slightly better. Compared to last year, their revenue in Q3 grew 9%.

But small-cap stocks saw their revenue shrink by 8%—their worst quarter in years. Image
Read 17 tweets
Mar 2
Many equity schemes of Invesco MF (@invescoindia) gave stellar returns in 2024.

-Invesco Contra: 31.37% vs Cat Avg: 21.97%

-Invesco Flexi Cap: 36.51% vs 21.99%

-Invesco Focused: 44.95 vs 21.00%

What has worked for them?

Are they using some high-risk strategies? A 🧵 Image
1. Growth Investing

Fund managers of Invesco MF don’t mind high valuations if the growth potential is strong. This is clear from the high PE ratio in their schemes.

As of Dec 2024, all Invesco equity funds had P/Es above 60, while P/Es of key indices ranged between 20-40. Image
Not just December, we found this pattern throughout 2024.

Except for the large-cap fund, all schemes had a P/E above 50 throughout the year.

In contrast, the benchmark indices fluctuated between 20-40. Image
Read 15 tweets
Feb 28
Imagine having a fund that makes returns amid both rising and falling markets.

This is possible through long-short strategies, which mutual funds don’t offer.

So, SEBI is introducing Specialized Investment Funds (SIFs) for retail investors.

How will they work? A 🧵
What Makes SIFs Special?

Like mutual funds help you ride on the stock-picking skills of fund managers, SIFs let you leverage their expertise in derivatives trading.

With long-short strategies, SIFs will aim to profit in both rising and falling markets.
Think of these short calls as an insurance policy against market crashes—hedging your portfolio so you either gain or fall less when markets tumble.

Will there be categories in SIFs like mutual funds?

The answer is YES.
Read 13 tweets
Feb 26
Markets are bleeding.

Nifty 100 is down 15.35% from its peak in September 2024.

The fall in mid-cap and small-cap indices is even worse.

But even in this sea of red, a few stocks have stayed afloat.

Which are these companies? A thread. 🧵 Image
Let’s start with large-cap stocks. 

The Nifty 100 index touched its peak on Sep 26, 2024. 

Since then, 94 out of 100 large-cap stocks have delivered negative returns.

Only six are in the green, with Bajaj Finance leading the pack.

See the other 5 stocks in the table. Image
Mid-cap Universe

Only 16 out of 150 stocks have braved the market carnage.

BSE and Lloyds Metals & Energy gave 38.2% and 28.1% returns, respectively.

In fact, there are 5 mid-cap stocks that have risen more than 10%. (See table) Image
Read 5 tweets

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