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Arbitrage Funds : Benefits & Risks

Arbitrage funds are slowly gaining popularity among investor.At least increasing Assets under arbitrage funds suggests so.Today,we will take view of arbitrage funds,benefits & associated risks.

Arbitrage fund generates income by taking advantage of arbitrage opportunities(simultaneous buy-sell mis-prized securities) that exists between Cash & derivative market.

Most of the asset management companies have arbitrage funds and few are as listed below:

Returns (CAGR)of last 01 year  and if investor have entered before 05 years…indicates reducing returns with time.

Arbitrage Funds Returns,Risks & Benefits

 

What is risk associated with arbitrage opportunities:

1.Reducing arbitrage opportunities:If arbitrage funds continuously  get high inflows,arbitrage opportunities may get reduced with time & it can impact the returns.If you have checked above table,returns of last year are much lower.Arbitrage funds are virtually risk free but may not be in reality.

2.Higher turnover :Due to simultaneous buy-sell transaction,arbitrage funds can have a high transaction cost which can impact the returns.

Benefits of arbitrage funds:

1.Tax free Redemption:Arbitrage funds have taxation similar to equity.So as per current taxation laws,if units are held for more than one year, capital gain tax will be nil.

2.Low volatility: NAVs are less volatile and standard deviations may be around 0.5-0.6.so there are less chances of capital erosion if held for period like one year.

Arbitrage funds can be good idea for high tax bracket individuals.Investor can get tax benefits but it will not generate any significant returns.For Investors who are in low tax brackets,arbitrage funds are not suitable & they can prefer to invest in liquid or ultra short term funds.

Indiabulls Housing Finance NCD Sept 2016:

One of leading private, housing finance company Indiabulls Housing Finance has come up with an issue of Secured & Unsecured issue of NCDs of worth Rs.3500 crore with an option to retain the over subscription of same amount,aggregating to issue size of Rs.7000 crore.

Indiabulls is non-deposit taking housing finance company registered with NHB.It offers housing loans and loan against property to salaries , self employed individuals,small-medium sized entrepreneurs.Company focuses more on long term,secured,mortgage backed loans.It also offers mortgage loans to real estate developers for residential and commercial purposes.

This is maiden public issue Indiabulls Housing Finance.

Details of Indiabulls Housing Finance NCD issue are as follows:

Imp Dates:

1.Issue Open Date:Sept 15, 2016.

2.Issue Close Date:Sept 23, 2016.(Issue has been closed on Sept 16, 2016 due to over subscription.)

Credit Rating : “AAA” from CARE & Brickwork which indicates very low credit risk.

Security: This NCD issue carries both secured and unsecured debentures.Investors of secured NCDs will receive cover against debentures while no security cover is against unsecured debentures but investors will be compensated with some higher coupon rates.

Following types of investors can apply:

Category I:Institutional investors (20% issue size reserved).

Category II: Non-institutional investors (20% issue size reserved).

Category III : HNIs (Resident individual / Karta of HUF applying for more than 10 Lakh).

Category IV : Resident individual applying for 10 Lakh or less.

Coupon Rates for Category IV Retail individual investors:

Coupon rates depends on tenure, interest payment frequencies and type of investor.Here NCDs have classified as per interest payment frequency – Monthly,Annual and Cumulative.

Monthly Interest Payment:

Indiabulls Housing Finance NCD Sept 2016 Monthly Interest

Annual Interest Payment:

Indiabulls Housing Finance NCD Sept 2016 Annual Interest

Cumulative payment Option:

Principal & interest on cumulative basis will be paid at maturity.

Indiabulls Housing finance NCD Sept 2016 Cumulative

Please note: 0.10% higher coupon rate for Category IV Senior Citizens.

PAT & NPA of  Indiabulls Housing finance:

Indiabulls housing ncd profit npa details

 

Other details:

1.Investor can apply in physical or demat mode.

2.Senior citizens applying for Rs.10 Lakh or less will get 0.10% higher coupon rates.

3.Taxation: Interest will be added in investors total income and taxed accordingly.Tax will not be deducted at source if NCDs are held in demat mode but it will be payable.

4.Allotment will be on first cum first served , on daily basis.

Should you invest or not:

Due to lower side interest rates from banks, risk appetite of retail investor for private NCDs is quite high.Especially,NCDs related to retail side lending are in high demand.Though interest rates are little lower as compared to DHFL or SREI Infra NCD, commensurate risk looks lower in this issue.So this NCD issue may also witness good demand .This issue has highest credit rating,low credit risk &  its maiden public issue of this company..so invest some part of fixed income as per credit risk profile.

Should You Invest In Balanced funds Paying Regular dividends:

If you have checked AUMs (Asset Under Management) of balanced funds,they are sky rocketing now a days.Along with positive market conditions, another important reason is they are paying monthly income in terms of dividends to investors.Thanks to optimistic market conditions,investors are also preferring them over traditional products like bank deposits,Postal MIS,Senior Citizen Saving Scheme,immediate annuity etc.

Today we will take view of balanced funds paying dividends periodically.

Following are few balanced funds paying periodic dividends like monthly or quarterly:

Balanced Funds periodic dividends Monthly Quarterly

so is it good idea to invest in balanced funds paying regular dividends:

I think, investor can …if he/she is in need of regular income & have proper asset allocation in place & further good thing about them is that dividends are tax free.Dividends paid from mutual fund schemes are tax free.

What investor should remember while investing in such options:

1. As per SEBI rules and regulations, any mutual fund scheme can pay dividend through profit generated / accumulated by that scheme only.so its possible that scheme may not pay dividends in long term bear phase.

2.Paying periodic dividends is not legally binding on mutual fund scheme.

3.Investors capital need not to be protected as investors profitability will depend on when he / she has entered in to the scheme & even though scheme is in profit..it doesn’t mean that every investor is in profit.

4.Dividends can kill compounding and harm returns in long term.so opt for periodic dividends if absolutely needed.

5.Periodic means need not to be fixed dividend amount.Dividend amount can vary depending on schemes profitability.

So conclusion is – Basic objective of balanced funds is to optimize risk, with allocation between equity & debt & provide commensurate returns.They are relatively lower volatile than pure equity funds.But are not completely risk proof.  Till,  it may not be harmful to opt periodic dividends if investor is investing through proper asset allocation and understands that NAV drops proportionately after each dividend is paid &  principal may or may not get protected.

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Information provided on this blog is for general purpose only & not investment advice.Please take advice of SEBI Registered Investment Advisors before taking any investment decision.
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