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*What are some of the mistakes of Indians that are destroying their financial lives?*
*Buying insurance policies for investment purpose *: Have you invested your money in insurance plan to get a return in future? Big mistake! Out of 100 people I have spoken, 95 have made this mistake.. Very few people understand the difference between term plan, endowment plan, etc.
*Not able to crack the credit card mystery:* Are you paying the minimum amout due on your credit card payment? If yes, you are trapped in credit card mystery. On the other side, very few people really enjoy the benefits like free lounge access, buy one get one movie ticket, etc.
*No idea about the power of compounding:* Everyone has come across the formula of compounding but very few people really understand its power. This is the reason people do not start saving early and hence lose out on the power of compounding. Albert Einstein said that power of compounding is the eighth wonder of the world.
*Buying stocks based on tips without any knowledge:* You will find every Tom, Dick and Harry giving stock tips over Facebook, Whatsapp and TV. Unfortunately, a lot of people fall in a trap of these people and invest money without any knowledge. What is the end result? They lose everything!
*Becoming a victim of lifestyle inflation*: Moving from 2bhk to 3bhk just because you have got a good hike, upgrading your car because you have got some bonus are some of the examples of lifestyle inflation destroying financial lives.
*Buying things just because they are on discount*: From Amazons Great Indian Sale to Flipkarts The Big Billion Days, everyone is encashing on the weakness of Indians buying things just because it is on discount. Funny thing is now you will find such sales every other month.
*Getting tempted to go for an exotic vacation* just because someone put a post on Facebook and Instagram: Instagram and Facebook are introduced as Social Media Platform but they are actually destroying the entire social fabric. Friends are jealous of each other. Most of them are just social media friends. Facebook and Instagram are more of a marketing platform where people post stuff just to get some likes and companies promote their product and services.
*Spending a bomb on weekend parties:* 5 days work and 2 days party: This is the new culture in India. Pubs are jam-packed on weekends where people would spend a bomb on drinks. By the end of the month, they are left with no money.
*No track of cash flow:* Very few people keep a track of their expenses. Most of them just dont know where the money is gone.
*No emergency budget:* Not having any extra money in the case of an emergency results in embarrassing situations of borrowing money from friends and relative. Some people even break their investments and make a big mistake.
*No medical insurance*: I have seen people losing out the lifetime savings just because they did not take medical insurance. One accident can shatter all financial dreams. Better be insured. Healthcare cost is rising and it is impossible to manage it without insurance.
*No financial plan:* People do not know why they need to save money because they dont know their financial goals.
*No diversification*: Some people would invest all their money in real estate, some would invest all the money in gold, some would just keep it in the locker, some would invest all the money in the stock market. Very few people understand the right way of diversifying the investments.
*Spending all the hard earned money on children marriage:* Thanks to our hypocritic society! People save their entire life just to spend all the money on random relatives who only bother about the food and arrangements. What is the topic of discussion at weddings? Sharma ji ne to unki beti ko car gift kari. (Mr Sharma has gifted a car to his daughter). Mehta ji ne unki beti ko 50 tola sona diya (Mr Mehta has gifted 500-gram gold to his daughter.)
*Buying excessive gold only to keep it in the locker:* Gold worth lakhs is kept in lockers only to be used once or twice a year. This is resulting in the money getting blocked and hence not getting any returns on it.
*An extremely conservative approach with investment:* Traditionally, people have been risk-averse. They would just have an FD and live on 67% annual interest. Some would just keep the cash at home.
*Lack of clarity between asset and liability:* Having a car is not an asset because it consumes fuel and has a maintenance cost. Its price will only depreciate in the future. Car is a necessity but people spend a lot of money and even take the loan to buy a luxury car over and above their budget.
*Considering frugal as cheap:* A lot of people confuse economic spending with being cheap. An economic spender does not compromise with quality but does his research well enough to buy the product or service at the lowest rate.
*Procrastinating investment decisions:* I will invest from tomorrow. But the problem is that tomorrow never comes.
*Spending a lot of money on fancy stuff:* A fancy car, a fancy house, a fancy watch, a fancy vacation. People want fancy stuff and willing to pay a premium irrespective of the value it generates.
*Lack of patience:* I cant wait for my wealth to grow. I want to double my investments in 6 months. I need to invest in the stock market. A lot of people lose their lifetime of savings because they dont have the patience to understand the investment option and would blindly trust anyone with their investment.
*Depending upon others for investment decisions:* I dont know anything about investment. Please manage my money. Unfortunately, a lot of people are dependent upon others with their hard earned money. This is the reason we have a lot of self-proclaimed experts giving stock market tips.
*Not discussing the money matters in the family:* Discussions related to money are considered as a taboo in Indian families. Nobody really discusses money matters.
*Getting too greedy with investment:* People blindly invest their money in penny stocks, day trading, futures and options. They eventually lose all their hard earned money. What is the root cause? GREED
*Wasting time on unproductive things:* Rather than learning new stuff and growing the skillset, people end up wasting time on social media and YouTube.
*Lack of disciplined investment:* Instead of spending what is left after investing, people invest what is left after spending. This results in indisciplined investment.
*Root Cause:* Lack of knowledge about personal financial management!!
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Arbitrage Mutual Funds : Basics, Things to Consider & More
Arbitrage Fund is a type of Mutual Fund which takes advantage of the differences in price of securities in the cash and derivatives market to generate a return.
Arbitrage Funds work on the mispricing of equity shares in the spot and futures market. The fund manager simultaneously buys shares in the cash market and sells it in futures or derivatives market. The difference in the cost price and selling price is the return you earn. Lets understand this with the help of an example.
Suppose the equity share of a company ABC trades in the cash market at Rs. 1220 and in the future market at Rs.1235. The fund manager buys ABC share from cash market at Rs 1220 and shorts a futures contract to sell the shares at Rs 1235. Towards the end of the month when the prices coincide, the fund manager will sell the shares in the futures market and generate a risk-free profit of Rs.15/- per share less transaction costs.
Conversely, if the fund manager feels the price to fall in future, he shorts equity shares in the cash market and enters into a long contract in the futures market. He will short sell the shares in the cash market at Rs 1235. At the expiry date, he buys shares in the futures market at Rs. 1220 to cover up his position and earns a profit of Rs. 15. In yet another scenario, the fund manager may buy an equity share for Rs. 100 in National Stock Exchange (NSE) and sell the same at Rs 120 in the Bombay Stock Exchange (BSE) to make a risk-free return.
Arbitrage funds make money from low-risk buy-and-sell opportunities available in the cash and futures market. Their risk profile is similar to that of a debt fund. In fact, many arbitrage funds use Crisil BSE 0.23% Liquid Fund Index as their benchmark. These funds are tailor-made for investors who are looking for an exposure to the equity markets but are wary of risks associated with them. Arbitrage funds become a safe option for the risk-averse individuals to park their surplus money when there is a persistent fluctuation in the market.
These funds leverage the market inefficiencies to generate profits for the investors in the intermediate horizon. In addition to taking positions in the equity markets, the fund manager allocates the remaining assets in the fixed-income generating instruments. While doing this, he ensures that the investment is made only in high-credit quality debt securities like zero-coupon bonds, debentures, and term deposits. This helps to keep the fund returns in line with expectations during the period of inadequate arbitrage opportunities.
As trades are carried out on the stock exchange, theres no counterparty risk involved in these funds. Even though the fund manager is buying and selling shares in cash and futures market, there is no risk exposure to equities as is the case with other diversified equity mutual funds. Though the ride looks smooth, do not get too comfortable with these funds. As more people start trading into arbitrage funds, there will be not many arbitrage opportunities available. The spread between cash and future market prices will erode, leaving little for the arbitrage focused investors.
Arbitrage Funds may be a good opportunity to make reasonable returns for those who can understand it and then make the most of it. The fund manager tries to generate an alpha using price differentials in markets. Historically, arbitrage funds have been found to give returns in the range of 7%-8% over a period of 5-10 years. If you are looking to earn moderate returns via a portfolio which has a perfect blend of debt and equity in a volatile market, arbitrage funds may be your thing. However, you need to keep one thing in mind that there are no guaranteed returns in arbitrage funds.
Cost becomes an important consideration while evaluating arbitrage funds. These funds charge an annual fee called expense ratio which is expressed as a percentage of the funds assets. It includes fund managers fee and fund management charges. Due to frequent trading, arbitrage funds would incur huge transaction costs and has a high turnover ratio. Additionally, the fund may levy exit loads for a period of 30 to 60 days to discourage investors from exiting early. All these costs may lead to increase in the expense ratio of the fund. A high expense ratio puts a downward pressure on your take-home returns.
Arbitrage funds may be suitable for investors having a short to medium term horizon of 3 to 5 years. As these funds charge exit loads, you may consider them only when you are ready to stay invested for a period of at least 3-6 months. At the same time, you need to understand that fund returns are highly dependent on the existence of high volatility. So, choosing a lump sum investment would make sense over systematic investment plans (SIPs). In absence of volatility, liquid funds may give better returns than arbitrage funds over the same investment horizon. Hence, you need to keep the overall market scenario in mind while choosing arbitrage funds.
If you have short to medium term financial goals, then arbitrage funds are your thing. Instead of a regular savings bank account, you may use these funds to park excess funds in order to create an emergency fund and earn higher returns on them. In case you were already invested in riskier havens equity funds, then you may begin a systematic transfer plan (STP) from the equity funds to a less risky haven like arbitrage funds as you approach completion of the financial goal. This would reduce your portfolios overall risk profile but at the same time reduce the returns also. You cannot expect to earn double-digit returns in arbitrage funds.
These funds are treated as equity funds for the purpose of taxation. If you stay invested in them for a period of up to 1 year, you make short-term capital gains (STCG) which are taxable. STCG are taxed at the rate of 15%. If you stay invested in them for a period of more than 1 year, the gains will be treated as long-term capital gains (LTCG). LTCG in excess of Rs.1lac is taxed at the rate of 10% without the benefit of indexation. Instead of sticking to pure debt funds, these are funds are suitable for conservative investors who are in higher tax brackets to earn tax-efficient returns.
Investing in Debt Funds is made paperless and hassle-free at ClearTax. Using the following steps, you can start your investment journey:
Step 2: Enter your personal details regarding the amount of investment and period of investment
Step 3: Get your e-KYC done in less than 5 minutes
Step 4: Invest in your favorite arbitrage fund from amongst the hand-picked mutual funds
While selecting a fund, you need to analyze the fund from different angles. There are various quantitative and qualitative parameters which can be used to arrive at the best arbitrage funds as per your requirements. Additionally, you need to keep your financial goals, risk appetite and investment horizon in mind.
The following table represents the top 5 arbitrage funds in India based on the past 1 year returns. Investors may choose the funds based on a different investment horizon like 5 years or 10 years returns. You may include other criteria like financial ratios as well.
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