So many mutual funds to invest in India. So many opinions are rolling on the internet. Where to invest?

The decision is always confusing. There are more than four thousand mutual funds in India. Choosing the right funds demands plenty of considerations. It includes analyzing your existing portfolio and exploring the current economic growth.

The performance of mutual funds changes due to various factors. Investing in mutual funds based on their rating or past performance is not a smart decision.

Then what is?

That’s what we’ll discuss in this blog. Instead of choosing mutual funds to invest in 2024, we will talk about the categories of funds that’ll perform well in the coming years.

But before that, let’s understand the global economy

Global Economic Conditions

The global economy is facing an uncertain volatile time due to a combination of geopolitical conflicts. As the economy was recovering from the COVID-19 pandemic losses, the Russia-Ukrain war caused another disruption. It significantly impacted the supply of essential commodities like oil, gas, and agricultural products. Therefore, gas and oil prices have inflated in many countries, particularly in Europe as it depends on Russian energy sources. The war also caused fluctuations in steel, palladium, and aluminum markets, thereby increasing the cost.

Other geopolitical conflicts such as tensions between Iran and Israel, and instability in Bangladesh, are increasing global uncertainty. Moreover, China is also showing signs of a slowdown which could impact demand for raw materials thereby fluctuating the commodity prices. Weak GDP numbers have caused Chinese stocks to decline. China’s equity barometer, the Shanghai Composite fell 3.3% in Aug 2024.

Japan is facing a Yen carry trade issue as the Bank of Japan raised the interest rates from 0.10% to 0.25%.

One of the advanced economies, the USA, is also facing economic volatility due to the possibility of a recession, increased rate of unemployment, and disappointing corporate profits. The US equities declined sharply at the beginning of Aug’24, but the market recovered by the end of the month. The major indices of the US- S&P 500 and Nasdaq 100, rallied by 2.3% and 1.1% respectively.

All these geopolitical events are causing uncertainties in markets worldwide. Now let’s take a look at how Indian markets are performing amid these conflicts.

Indian Market Outlook

Fortunately, the Indian economy is booming. Industries like Pharma, Solar, and Tech, are significantly contributing to the economic growth.

Power demand is rising. Credit growth is expanding. Banking and Corporate sectors are rallying up. And not to mention, we have one of the best macros in the world.

Between Sept 2023 and Sept 2024, the Nifty 50 grew by approximately 26.49% and Sensex grew by 23.17%.

Around July and August 2024, the Yen carry trade issue and the US slowdown caused a slight decline in the equity markets. However, we’re currently in the liquidity bull run. Therefore, the impact wasn’t as significant as it would have been.

If you take a look at the charts above, the mid-cap and small cap valuations are expensive compared to large-cap at the moment. While mid-cap and small-cap are at their all-time high, the large-cap is still close to its three-year average level.

The long-term India Growth story remains intact. However, the global economic crisis is bound to have an impact on the Indian economy.

So then how do you ensure portfolio growth while dodging the market uncertainty?

The answer is- Asset Allocation!

What is Asset Allocation?

Asset allocation refers to distributing your money across various asset classes such as equity, fixed income, gold, real estate, international equity, etc.

Asset allocation is crucial to avoid dependence on the single asset class. That way, when one asset class is going through a decline, the other asset class can maintain the balance of your portfolio.

Take a look at the table below. As you can see, asset classes are never in sync. For example, in 2020, gold performed better than equity and debt. However, in 2021, equity significantly outperformed gold.

An ideal mix of all assets offers a perfectly balanced portfolio.

Now let’s move on to the mutual funds to invest in 2024 considering the market outlook. Your focus should be on the asset allocation. Below are some of the fund categories that can strengthen your portfolio amid global economic changes.

Best Mutual Funds to Invest in India in 2024

1. Dynamic Asset Allocation Fund (AKA Balanced Advantage Fund)

These are hybrid funds with a mix of equity and debt. Balanced Advantage Funds invest 65-80% of total assets into equity and 35-20% in debt.

Fund houses use valuation metrics such as the Price-to-Earnings (P/E) or Price-to-Book (P/B) ratios of indices like the Nifty or Sensex to strategically adjust equity/debt exposure. For example, increasing the equity exposure when the market corrects to capitalize on the discount. Or increasing the debt exposure by selling equity when markets are overvalued.

Considering the current market scenario, BAFs are ideal for balancing equity and debt exposure. Instead of deciding the allocation by yourself, you can invest in BAFs and let the fund manager handle it for you.

The risk-return ratio on these funds varies based on allocation. Some BAFs are aggressive with the majority of the allocation to equity. Whereas conservative BAFs provide a debt-fund-like experience with some exposure to equity for growth. Choose the fund that fits your preference.

Some of the BAFs that you can look at are:

1. ICICI Prudential Balanced Advantage Fund
2. Kotak Balanced Advantage Fund
3. Quant Dynamic Asset Allocation Fund
4. SBI Balanced Advantage Fund

BAFs are ideal for investors seeking equity growth with lower risk. Fund houses leverage the equity market movement to generate superior returns. The debt component balanced the volatility and reduced the risk.

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2. Multi Asset Funds

Multi asset funds are also hybrid funds with exposure to equity, debt, and gold. These funds offer instant diversification across three different asset classes.

These funds offer at least 10% exposure to each asset class. Most multi asset funds are equity-oriented with at least 65% exposure to equity to make them tax-efficient and the remaining exposure to debt and gold.

While equity will contribute towards the growth of this category, gold is playing its role better than ever. This year (YTD2024), gold has surpassed the Sensex by delivering 16% year-to-date returns. If the global economic conditions continue to fluctuate, gold will emerge as a safety net. Therefore, having exposure to gold is beneficial for your portfolio’s overall growth.

Multi asset funds have become investors’ preferred choice. These funds efficiently navigate market volatility by diversification. Ever since the debt fund taxation changed, these funds have gained more popularity. The AUM for multi asset funds has nearly doubled between March 23 to March 24. You can invest in debt with equity taxation, making these funds more attractive.

Multi asset funds are ideal for investors with conservative to moderate risk appetite.

Here are some of the MAFs you can consider:

1. ICICI Prudential Multi Asset Fund
2. Kotak Multi Asset Fund
3. Quant Multi Asset Fund

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3. Flexi Cap Funds

Flexi cap funds provide flexible asset allocation across the market capitalization and sectors/themes. Currently, small-cap and mid-cap segments are expensive whereas large-cap is fairly valued as shown above in the Indian market outlook. Instead of wondering where to invest, flexi cap offers a healthy blend of all three categories.

Unlike multi-cap funds, flexi cap funds have no restrictions on market cap. Fund houses use various value-based, risk-adjusted strategies to shift allocation across the market cap. These strategies jump on the market opportunities to maximize returns.

The risk factor for these funds may vary based on the exposure across the market cap. Do check the current allocation of the fund before investing to see if it matches your risk appetite.

These funds are ideal for moderate investors to build wealth over a long horizon.

Here are some of the flexi cap funds to explore:

1. HDFC Flexi Cap Fund
2. Quant Flexi Cap Fund
3. Motilal Oswal Flexi Cap Fund
4. JM Flexi Cap Fund

4. Large Cap Funds

Over the last three years, large cap segment has been appropriately valued. The category has been lingering around the three-year average return level. In the coming years, fresh inflows from FIIs and DIIs are most likely to chase large cap category because of its relatively fair valuation.

Small and mid cap funds, being aggressive, are ideal for 7+ years of investment horizon. Whereas large-cap can cater to your 5-year financial goals. Large-cap funds are suitable to balance the volatility of small or mid cap funds in your portfolio. These funds are specifically suitable for new investors wanting to explore equity market. Start with large-cap then gradually explore small and mid cap funds.

Here are some of the large cap funds to view:

1. Nippon India Large Cap Fund
2. Quant Large Cap Fund
3. ICICI Prudential Bluechip Fund
4. HDFC Top 100 Fund

Factors to Consider Before Investing in Mutual Funds

While the market outlook is important to craft your portfolio, there are various other factors to consider.

1. Your Financial Goals and Their Timeline

Setting clear goals and desired timelines helps optimize your portfolio. For example, if you’re planning to invest for a longer horizon, maybe to buy a home, you can invest in the aggressive scheme. Because risk is more associated with time than the scheme itself. Time mitigates risk.

On the contrary, if you’re planning for a short-term goal, for example buying a car, opt for safer funds. Debt funds or hybrid funds are ideal in such scenarios.

Allocate funds to your goals. That way, you’re not bothered by the market movements. All you have to do is stick to your investment strategy and time horizon.

Your financial advisor can help you create a strategy as per your goals. If you don’t have an advisor, you can book an appointment with experts at VNN Wealth to build your portfolio.

2. Your Risk Appetite

Take a risk profiling quiz to analyze how much risk you are comfortable in taking. The quiz will evaluate your financial as well as behavioral aspects to determine the suitable asset mix.

Your risk profile is a crucial factor in determining ideal mutual funds for you. If you’re an aggressive investor, you can explore aggressive categories. Otherwise, a balanced asset allocation is a way to go.

3. Your Existing Portfolio

All the categories we mentioned above are suitable for both new and experienced investors. However, an experienced investor must review their existing portfolio to ensure true diversification.

A portfolio review will not only identify a gap in your portfolio but also avoid redundancy. Evaluate your investments with respect to your current financial situation and your goals. Our experts will also help you with the tax-efficient exit strategy to realign your portfolio.

Conclusion

Investing in mutual funds needs a strategic approach. You have to consider both the economic conditions and your financial goals. With the global economy facing uncertainties due to geopolitical tensions and market volatility, an optimized asset allocation strategy can offer stability and growth.

Currently, the best mutual funds to invest in India are Balanced Advantage Funds, Multi Asset Funds, Flexi Cap Funds, and Large Cap Funds. These funds help mitigate risks and capitalize on market opportunities.

While choosing the funds to invest, don’t chase past performance. The market may or may not replicate past success as the economy keeps changing, sectors are cyclical in nature and keep moving up and down. What may have worked for one fund in the past may not necessarily work in the future. Read the mutual fund factsheet instead to understand the allocation, rebalancing model, risk factor, etc.

Aligning your investments with your risk appetite, financial goals, and time horizon. Focus on diversifying your portfolio to navigate the changing economic landscape. Talk to an expert to further strengthen your portfolio and ensure long-term growth. Get your portfolio reviewed by our experts to receive personalized investment opportunities.

Money market funds are a type of open-ended debt funds with high liquidity and short-term investment horizon. These funds invest in debt securities with high credit ratings, bringing stability and diversification to your portfolio.

In this article, we will highlight the features and advantages of money market mutual funds.

What is a Money Market?

Money markets are the financial markets that deal with short-term lending and borrowing with up to one year of maturity period.

The key instruments in money markets are:

Treasury Bills (T-Bills): The RBI issues T-bills to raise money for a duration of up to 365 days.
Certificate of Deposits (CDs): Scheduled commercial banks offer CDs for a specific tenure in a dematerialized form. CDs are similar to FDs with a lock-in, i.e. you cannot withdraw CD before the maturity.
Commercial Papers (CPs): Companies and financial institutions release commercial papers to raise money for a short duration. CPs have high credit ratings and are usually available at discounted prices.
Repurchase Agreements (Repos): RBI lends money to commercial banks in the form of repos.

What are Money Market Funds?

Money market funds invest in low-risk short-term debt instruments such as treasury bills, commercial papers, repos, etc. The maturity period of the underlying assets ranges from one day to one year. These funds are suitable to introduce stability to your portfolio while generating a source of income through interest.

Advantages of Money Market Funds

High Liquidity

Money market funds are highly liquid with underlying assets maturing within a year. These funds are better suited for 6 months to 1 year of investment horizon.

Low Interest Rate Risk

Debt funds are prone to interest rate risk as when the interest rate goes up, bond prices go down. Therefore, the longer the maturity of a debt fund, the higher the interest rate risk. As money market funds have a short maturity period of up to one year, the interest rate risk is low.

Stability

Short-duration debt instruments are known for low volatility. That is, the value of these funds does not fluctuate drastically. These funds are stable and ideal for investors seeking principal protection.

Superior Returns Compared to Savings Account/Fixed Deposit

These funds tend to deliver superior returns than bank FD or savings accounts for a similar duration. However, the returns are lower than long-term debt funds.

Factors to Consider Before Investing in Money Market Funds

Risk

Though money market funds carry relatively lower risk, these funds are prone to interest rate risk and market fluctuations. These funds may also carry reinvestment risk. As the funds invest in new securities as and when the old ones mature, the reinvestment may happen at a lower interest rate.

Investment Horizon

Money market funds are only suitable for 3 months to a year of investment. If you are planning for a longer investment horizon, you can explore other debt fund categories such as dynamic bond funds, medium to large-duration debt funds, etc.

Cost of Investment

Always ensure the exit load and the expense ratio associated with any mutual fund. Read the fund-related documents carefully before investing.

Tax Implications

Capital gains earned from these funds attract tax. The payable tax depends upon the investment duration. Short-term capital gains tax will be applicable for investments redeemed before 36 months. Otherwise, you’ll have to pay long-term capital gains for investments held for more than 36 months.

In the case of debt funds, both STCG and LTCG are taxed at your tax slab.

Who Should Invest?

Money market funds are ideal for investors seeking liquidity and short-term investment avenues. These funds are ideal to park your surplus funds instead of keeping them in a bank account. You can leverage these funds to build an emergency fund of up to one year. Investors with low to moderate risk appetite can consider these funds to mitigate equity investments.

Take a quiz to understand your risk profile.

Conclusion

Money market funds are a perfect fit for investors seeking liquidity, low risk, and stable returns. These funds can be a part of your emergency funds or a short-term financial goal. Rather than keeping your funds in a savings account, you can utilize these funds to earn superior returns.

It is important to note that, while these funds are safe, they’re not entirely risk-free. Make sure you evaluate your financial goals and risk appetite while investing. If you’re unsure whether to invest in debt funds or not, get in touch with us. Our experts will review your portfolio and help you realign it with your financial goals.

What if you could save tax and earn reasonable returns on your investment?

Say hello to the Equity Linked Saving Scheme (ELSS). ELSS mutual funds offer tax exemption of up to INR. 1,50,000 under the section 80C of the IT Act. So while equity instruments encourage your wealth creation, you can also lower your overall tax liability.

Let’s get to know these funds better…

How Do ELSS Mutual Funds Work?

ELSS mutual funds are open-ended equity funds with 3 years of lock-in period. The scheme invests at least 80% of the assets in equity or equity-related instruments. 

The underlying stocks in these funds range across market capitalization (Small-cap, Mid-cap, large-cap) and different sectors. These funds aim to maximize your return on investment while providing tax exemption.

Benefits of Investing in ELSS Mutual Funds

1. Short Lock-in Period

Among all the instruments eligible under section 80C of the IT Act, ELSS funds have the shortest lock-in period.

Investment Instruments Eligible for Tax deduction under 80C of the IT Act	Lock-in Period	Risk Level	Expected Returns
ELSS	3 years	High	Depends upon market performance
Tax Saver Fixed Deposit	5 years	Low	Between 6%-8% p.a
National Savings Certificate (NSC)	5 years	Low	7.7% p.a. (may change every financial year)
Public Provident Fund (PPF)	15 years	Low	7.1% p.a. (may change every financial year)
National Pension System (NPS)	Till retirement	Moderately high	Depends upon market performance

ELSS mutual funds are ideal for you if you don’t want to lock your money for a longer horizon. 

2. Inflation Beating Returns

Equity-linked savings schemes invest the majority of their assets in equity or equity-related instruments. Therefore, these funds have the potential to deliver superior returns compared to other 80C instruments. Over the long term, these funds can help you build significant wealth. 

3. Tax saving

By investing at least INR. 1,50,000 in ELSS mutual funds in a financial year, you can claim tax deduction under section 80C of the IT Act. 

4. Portfolio Diversification

ELSS mutual fund managers distribute the fund assets across market capitalization, sectors, and themes. This diverse investment strategy lowers the concentration risks. 

Factors to Consider Before Investing in ELSS Mutual Funds

1. Fund Performance

Before you choose the ELSS fund, you must compare its performance against the peers and the benchmark. While a fund’s past performance can give you an idea of how it performed during various economic conditions, it’s not the only measure to judge any fund. Therefore, it is crucial to analyze the rolling returns for accurate performance analysis.

Explore the types of returns on mutual funds. 

2. Your Risk Appetite and Financial Goals

Ensuring the mutual fund aligns with your risk profile and fits in with your financial goals is important. Being an equity-heavy scheme, ELSS funds hold higher risk. 

The fund performance may fluctuate with market movements. Staying invested for a longer horizon, even after the lock-in period is over, can mitigate the risk.

Determine your Risk Profile by taking our risk profiling quiz. 

3. Fund Factsheet

The mutual fund factsheet holds all the financial parameters such as the fund’s standard deviation, alpha, beta, Sharpe ratio, etc. These parameters may sound complex, but they make comparing two funds quite easy. 

You can learn how to read a fund factsheet here.

Apart from the fund parameters, the factsheet also contains the investment cost of a fund such as expense ratio, exit load, etc.

4. Redemption 

You can invest in ELSS mutual funds either via lump sum or SIP. The lump sum amount will be eligible for redemption after 3 years of the lock-in period. However, SIP redemption is different. 

If you start an SIP of ELSS fund, the three-year lock-in period applies to each installment. Let’s take an example of investing INR. 1,50,000 in a financial year in an ELSS fund via monthly SIP of INR. 12,500. 

Each SIP installment will have its own lock-in period of 3 years. 

-The first installment on 1st Jan 2024 will mature on 1st Jan 2027. 

-The second installment on 1st Feb 2024 will mature on 1st Feb 2027. 

-The third installment on 1st Mar 2024 will mature on 1st Mar 2027. 

-And so on…

Therefore, your entire investment will not be eligible for redemption at once. You can redeem eligible installments by raising a request to the mutual fund house. 

Tax Implications on ELSS Mutual Funds

Equity-linked Savings Schemes attract equity tax implications after redeeming funds. As the fund has a 3-year lock-in period (more than 12 months), there won’t be any short-term capital gain taxation. 

You will have to pay a 12.5% long-term capital gain tax on profit exceeding 1.25 lakhs in a financial year of withdrawal. You don’t have to pay any tax if your profit on ELSS funds is less than 1.25 lakhs.

Who Should Invest in ELSS Mutual Funds

ELSS mutual funds are ideal for professionals seeking tax deduction options. By investing INR. 1,50,000 in ELSS funds, you can claim tax deductions under section 80C of the Income Tax Act. 

While PPF, EPF, NPS, and tax-saver FD offer similar tax benefits, the returns could be lower and the lock-in period is higher. ELSS demands only 3 years of commitment in exchange for superior returns and tax exemption. 

Not only will the ELSS fund provide tax benefits but also offers instant diversification across equity markets. You can easily invest a lump sum amount or start a SIP with VNN Wealth. Be sure to evaluate your risk profile by taking our risk profiling quiz.

Conclusion

Equity-Linked Saving Scheme is a popular tax saving instrument. ELSS promotes wealth creation by delivering superior returns compared to other tax-saving schemes and lowering tax liability.

Investors can invest INR. 1,50,000 in an ELSS scheme via lumpsum or via SIP, as per convenience.

Explore various categories of mutual fund schemes here and effortlessly start investing. 

Balanced Advantage Funds bring the best of both worlds- The thrill of equity and the safety of debt. 

BAFs are hybrid active funds that distribute your money into equity, debt, and cash. These funds dynamically shift allocation between equity and debt for superior returns with downside protection.

If you are wondering how to choose the balanced advantage fund, this blog holds the RIGHT answer.

Spoiler alert: Past performance is not the only criteria for selecting funds.

Let’s unwind the strategy.

What are Balanced Advantage Funds?

Balanced Advantage Funds invest about 65-80% of total assets into equity and 35-20% in debt. These funds also hold a small percentage of cash for liquidity or capitalizing on market conditions.

Fund managers strategically and dynamically move the allocation from stocks to bonds. 

For example, if the markets are going through a correction, fund managers can increase equity exposure. Similarly, if the markets are overvalued, they can sell off equity and reallocate that money to debt instruments. 

These funds deliver superior returns over the horizon of 3 to 5 years or more. Investors with moderate risk appetite can consider hybrid funds instead of pure equity funds. BAFs are the perfect way to introduce instant diversification to your portfolio. 

Now, let’s answer your question…

How To Select The Balanced Advantage Fund?

Many investors believe that past performance is the only way to evaluate mutual funds. While past performance can help you understand the consistency of the fund against the benchmark. It’s not the only, or the primary, criteria to evaluate funds. 

The most effective way to evaluate any fund is to compare it with benchmark and other funds from the same category. To do so, you can refer to the factsheet of funds to compare key measures.

The key measures AKA key ratios are the technical aspects of the funds. The numbers are always easy to read and they project accurate expectations.

Now, coming back to Balanced Advantage Funds. 

Apart from benchmark comparison, one of the important ways to choose BAF that fits your requirements is to compare Cash vs Equity Exposure. You can find this information in the factsheet of the fund. 

Let’s take a few BAF examples. 

The values were fetched on 3 Jan 2023. Click on the hyperlink on each fund to view current values. 

BAFs with Higher Cash Exposure

Balanced Advantage Funds hold a small percentage of cash for liquidity or to benefit from market movements.

If you think the markets are expensive at the moment and may fall- choose BAFs with higher cash holdings as they can buy more equity.

The more cash holdings, the more you can benefit by increasing equity exposure.

In the above table, ICICI Prudential Balanced Advantage Fund has cash holdings of 30.66%. 

Compared to the other funds, ICICI pru BAF will be able to buy more equity when the markets fall.

BAFs with Higher Equity Exposure 

Contrary to the above filter, if you think the market may rally further, choose the BAF with maximum equity exposure.

When the market boosts, BAF with more equity exposure will naturally deliver superior returns. 

In the table above, Edelweiss Balanced Advantage Fund has 71.97% equity exposure. That fund will deliver higher returns compared to other funds during a market rally.

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Final Thoughts

Equity exposure vs Cash holdings is one of the important criteria to consider before investing in Balanced Advantage Funds.

However, as mentioned above, you must also evaluate the fund’s factsheet for more insights. The fund should fit your risk appetite and financial goals.

Now, if you don’t have a view of the market to filter BAFs, you can always contact your financial advisor. They can keep you informed about the market movements and also plan your investments.

Or, you can get in touch with experts at VNN Wealth. If you are looking for financial advisors in Pune, we can meet in person (write to us). Not to worry if you’re not from Pune as you can schedule a virtual meeting with VNN Wealth at your preferred time slot. 

Follow @vnnwealth for more insights into the world of finance.

Arbitrage funds are hybrid equity-oriented funds that simultaneously buy and sell assets from different markets to book profit. Meaning, these funds take advantage of the difference in stock price in two different markets. 

These funds are ideal for investors looking for safer avenues to invest in during volatile markets. Read along to find more. 

How Do Arbitrage Funds Work?

Arbitrage funds buy assets from one market at a certain price and sell the same assets at a different market at a higher price. Both ‘Buy’ and ‘Sell’ transactions take place on the same day. 

As per SEBI guidelines, these funds invest at least 65% of total assets into equity and equity-related instruments. 

Let’s take an example:

A stock of an XYZ company is trading at INR 500/unit on the Bombay Stock Exchange. 

The same stock is trading at INR 515/unit on the Bangalore Stock Exchange. 

There’s an opportunity to earn INR 15/unit profit without any risk. Fund houses will buy the units from the Bombay Stock Exchange and sell them at the Bangalore Stock Exchange. 

Arbitrage funds may also operate within the Spot Market and Futures Market. 

Let’s say a stock of an ABC company is trading at INR 1000/unit at the Spot market. Fund houses will buy these stocks and the transaction will settle on the ‘Spot’.

The same stock has a value of INR 1020/unit in the Futures market. Fund houses will lock the ‘Sell’ for that price on the same day, which will settle at a future date (a month later.)

After locking the profit, the stock price in both markets has no impact on the returns. In both scenarios, investors will earn the profit they have locked in the beginning. Therefore, these funds are immune to market volatility. 

Factors to Consider Before Investing in Arbitrage Funds

1. Risk vs Returns

Arbitrage funds carry comparatively lower risk than other equity funds. Since the profit will be locked, market volatility would be of no concern. 

In fact, these funds may deliver superior returns during a volatile market. There is a chance that the future price of the asset to be significantly higher during a volatile market. Investors may lock in more profit when the asset prices are aggressively updating. 

However, when markets are flat, the asset price difference might be negligible. The fund may deliver lower returns.

2. Investment Horizon

Arbitrage funds are ideal for 6 months to 2 years of investment horizon. The arbitrage opportunities can deliver superior returns in 6 or more months.

If you want to park a lumpsum amount for a while at a comparatively safer avenue, go with these funds.

Additionally, staying invested for more than 12 months will also be tax-efficient. Plan your investment horizon accordingly.  

3. Fund Manager Strategy

Fund managers are always on the lookout for arbitrage opportunities. They strategically pick up underlying assets to ensure profit. Additionally, the fund also maintains a small allocation in debt/fixed-income securities to balance the returns. 

Arbitrage opportunities may not be abundant. A fund manager’s strategy makes all the difference in the returns of these funds. 

4. Expense Ratio

The expense ratio is a certain fee you have to pay to the fund house for managing your investments. As Arbitrage funds execute trade transactions every day, the expense ratio is often high. You may also be liable for a higher exit load if you redeem your investment between 30 to 60 days. 

Tax Implications on Arbitrage Funds

Arbitrage Funds follow equity taxation rules based on investment duration. 

You will have to pay a 20% tax on Short-term Capital Gains (Investments redeemed within 12 months.)

Long-term Capital Gains (Investments redeemed after 12 months) are taxed at 12.5% above 1.25 lakhs.

Who Should Invest in Arbitrage Funds?

Arbitrage funds are ideal for investors wanting superior returns than debt funds, but at the same time lower risk compared to equity funds. 

Investors with higher tax brackets can benefit from better post-tax returns.

For aggressive investors, these funds can bring stability during volatile markets. While you are exploring high-risk equity funds, Arbitrage funds can be your safety net.

It is always advisable to take the opinion of your financial planner before investing in any funds. 

Conclusion

Ever since debt funds taxation changed, the demand for Arbitrage funds has increased.  

These funds can hold your portfolio together during market volatility. Investors with a low-risk appetite can invest in this category. However, note that the returns on these funds may not be as superior as other equity funds. 

If you find these funds appealing, financial advisors at VNN Wealth can help you analyze your portfolio. Give us a call to know if these funds fit your risk profile and financial goals.

Overnight funds are debt funds that invest in securities maturing in a day. These funds were introduced in 2018 after SEBI reclassified mutual funds.

These open-ended funds are safe, highly liquid, and can be an alternative to your current account.

Overnight funds invest the majority of the assets in:

• Collateralized Borrowing and Lending Obligation (CBLOs)
• Reverse Repos
• Debt instruments with a maturity of one day.

Before we understand who should invest in these funds, let’s explore the benefits.

4 Benefits of Investing in Overnight Funds

1. High Liquidity

As the name suggests, these funds have a maturity of a day. Investment and redemption can take place within trading hours. You can park an idle lump sum amount in these funds instead of keeping it in your current account.

2. Low Risk

The underlying assets in these funds keep maturing every day. Since the interest rate will not change in a day, the risk is negligible.

Additionally, the chances of default for an asset maturing in a day are close to zero. Therefore, these funds are safe to invest in. 

3. Low Cost

Most debt securities charge exit load unless you hold your investment for a longer horizon. Even liquid funds expect you to hold your investment for at least 7 days to avoid exit load.

Overnight funds, on the other hand, do not charge any exit load. You can withdraw funds the next day. 

Moreover, these funds tend to have a low expense ratio of less than 0.5%. 

4. Flexible Investment Horizon

You can keep your money in overnight funds for as long as you want. While being able to redeem in a day is a great advantage, you can keep it longer as an emergency fund.

The redemption process is quick. Therefore, investors have the luxury of a flexible investment horizon. 

3 Things to Consider Before Investing in Overnight Funds

1. Risk vs Returns

Overnight funds are the safest debt funds to invest in. The possibility of default risk is close to zero.

However, investors have to compromise on returns in exchange for low risk. Overnight funds may not deliver superior returns. These funds are an alternative to your current or savings account.

2. Financial Goals

Overnight funds may not be an avenue to boost your portfolio returns. These funds make parking a surplus amount comfortable due to high liquidity.

Take your financial goals into account while investing. Don’t expect high returns. Rely on these funds for security and quick redemption.

3. Tax Implications

Since April 2023, tax implications on debt funds have changed.

Both Long-term Capital Gains (Investment redeemed after 36 months) and Short-term Capital Gains (Investment Redeemed before 36 months) will be taxed as per the investor’s tax slab.

The indexation benefit is only applicable to hybrid funds with at least 35% equity exposure. 

Explore Mutual Funds taxation rules here. 

Who Should Invest in Overnight Funds?

Overnight funds are suitable for investors looking to park surplus money overnight with no risk and high liquidity.

Ideally, these funds align more with the financial requirements of mid to large-size organizations than retail investors. Companies can park a large lump-sum amount overnight before reutilizing it. 

Retail investors can explore other debt funds before making a decision. Make sure the fund objectives align with your financial goals. 

Conclusion

Overnight funds offer several benefits such as daily maturity, low risk, low cost, and quick redemption. 

However, it is essential to note that high liquidity and safety come with comparatively lower returns. Corporations can benefit from these funds. Retail investors can use these funds as an alternative to a savings or current account.

We recommend analyzing your portfolio with your financial planner before making a decision. If you don’t have a financial advisor, VNN Wealth is just a call away.

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