Motilal Oswal Mutual Fund has launched a new arbitrage fund with a unique zero-expense offer for the first year. The New Fund Offer (NFO) is open for subscription from 16-19 December. This offer is exclusively available for direct plans, catering to investors who prefer the direct investment route.
What are arbitrage funds?
Arbitrage funds are hybrid mutual funds designed to exploit price differences between the cash and derivatives markets of the same security. By buying in one market and selling in another simultaneously, these funds aim to generate risk-free returns. They are particularly appealing to investors seeking short-term, low-risk parking for their funds.
Why arbitrage funds stand out
One of the key advantages of arbitrage funds is their tax efficiency compared to debt funds. While returns from debt funds are taxed as per an investor’s income tax slab, arbitrage funds enjoy equity taxation benefits.
Long-Term Capital Gains (LTCG): Taxed at 12.5%.
Short-Term Capital Gains (STCG): Taxed at 20%.
Tax exemption: Gains up to ₹1.25 lakh annually on equity-oriented funds are tax-free.
This makes arbitrage funds a smart choice for tax-savvy investors.
Performance overview
Arbitrage funds typically deliver stable yet moderate returns, appealing to conservative investors. As of 10 December, the category average returns were:
1 Year: 7.34%
3 Years: 6.02%
5 Years: 5.12%
10 Years: 5.84%
text-align: justify;”>(Source: Value Research, Returns as on December 10, 2024)
What does Motilal Oswal’s zero-expense offer mean?
By waiving the expense ratio for the first year, Motilal Oswal’s Arbitrage Fund offers investors a chance to maximize returns. The expense ratio, usually charged to cover operational costs, directly impacts net returns. Eliminating this cost in the initial year makes the fund particularly attractive for short-term investors looking for a tax-efficient parking option.
Industry experts indicate that the fund’s total expense ratio (TER) for the first year will be approximately 7 basis points, covering only operational costs. This is significantly lower than the industry average TER of 33 basis points for arbitrage funds, making it a highly cost-effective choice.
“Arbitrage funds also come with the added advantage of equity taxation benefits, making them a more efficient choice for investors with an investment horizon of 90 days or more, as opposed to debt funds, where gains are taxed at the marginal rate,” said Akhil Chaturvedi, executive director and chief business officer at Motilal Oswal Asset Management Co.
Final thoughts
Motilal Oswal Mutual Fund’s decision to waive the first year’s expense ratio for its arbitrage fund is a strategic move aimed at attracting cost-conscious investors. With equity-like tax benefits and a low-risk profile, this fund could appeal to those seeking short-term opportunities.
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