Unlock High Returns: The Secret Investment Strategy Beating Traditional Debt!

Author

Simar Singh | Whalesbook News Team

Detailed Coverage:

Income Plus Arbitrage Funds are being highlighted as an attractive investment avenue for parking surplus funds for short to medium terms, offering a blend of stable income and tax efficiency. These funds typically allocate about 65% to high-quality debt instruments like corporate bonds, government securities, and money market instruments. The remaining portion is invested in equity arbitrage strategies. Fund managers exploit minor price differences between the stock's cash market and its futures market to generate extra returns.

The structure of these funds allows them to qualify for equity taxation benefits. This means long-term capital gains are taxed at a lower rate of 12.5%, compared to the higher marginal tax rate applicable to traditional debt instruments, especially after debt funds lost their indexation benefits. This makes them particularly beneficial for investors in higher tax brackets.

Top funds have shown impressive three-year returns between 8% and 14%, and one-year returns between 7.5% and 13%, driven by current high short-term interest rates and favorable arbitrage opportunities. These funds are best suited for investors with a 2-3 year investment horizon.

High-net-worth individuals are increasingly using these funds to book profits from volatile assets like equities and commodities, redeploying gains to preserve capital and optimize their debt allocation. The funds offer daily liquidity with T+1 redemption, meaning investors can access their money quickly without significant mark-to-market risk.

Impact These funds can significantly impact an investor's net returns by offering tax-efficient growth and capital preservation. For fund houses, promoting such hybrid products can attract a segment of investors seeking lower volatility than pure equity but better post-tax returns than pure debt. Rating: 7/10

Explained Terms: Accrual: Income earned on a debt security that has not yet been paid out. This typically includes interest payments. Arbitrage strategies: A trading strategy that involves buying and selling assets simultaneously in different markets to profit from tiny price differences. The goal is to lock in a risk-free profit. Cash and futures markets: The cash market is where assets are bought and sold for immediate delivery. The futures market is where contracts for the future delivery of an asset are traded. Equity taxation benefits: Tax rules that apply to investments in stocks and equity-oriented funds, often offering lower tax rates on capital gains compared to debt instruments. Marginal rate: The tax rate an individual pays on their last dollar of income earned. It's the highest tax bracket an individual falls into. Indexation benefits: An inflation adjustment made to the cost of an asset when calculating capital gains tax. This reduces the taxable gain, especially over long holding periods. (Note: Debt funds have lost this benefit). High-tax-bracket investors: Individuals whose income falls into the highest tax rate categories. Mark-to-market risk: The risk that the value of an investment will decline due to changes in market prices. For debt instruments, this is influenced by interest rate movements. Arbitrage opportunities: Situations where arbitrage strategies can be profitable due to temporary price discrepancies in related assets. Spreads: The difference between the buying price and selling price of an asset, or the difference between two related prices (like cash and futures). Narrow spreads mean smaller potential profits. Debt yields: The rate of return an investor can expect to receive from a debt instrument, typically expressed as a percentage.