How arbitrage funds might have systemic risk on a tax-rule change

Capitalmind Podcast

"If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck", goes the saying. Arbitrage mutual funds are actually taxed as equity funds but they actually behave as debt funds.

And this tax arbitrage of arbitrage funds is what the regulators may be looking to fix.

In light of this, we have our latest episode of the Capitalmind Podcast, where we dive into the intriguing world of arbitrage mutual funds, also known as arb funds.

In this shorter episode, our hosts, Deepak and Shray, explores the role these funds play in your investment portfolio and delves into the impact of recent changes in debt mutual fund taxation on arbitrage funds.

Here's a sneak peek of what you can expect from this episode

• The Role of Arbitrage Funds: Discover the peculiar position these funds hold, being described as equity funds but offering debt-like returns.
• Taxation Changes and Their Effects: Explore how the recent changes in the income tax code could potentially affect arbitrage funds.
• Deepak shares his insights on the first and second-order effects of these tax changes and highlights the potential short-term buying opportunities that may arise.
• Risk-Free and Low-Risk Investment Options: Understand the investment landscape going forward in the likely new tax environment. Discover what alternative options exist for risk-free or low-risk investments in light of these changes.

Here are five key questions that will be answered in this episode

• What role do arbitrage funds play in your investment portfolio?
• How will recent changes in debt mutual fund taxation impact arbitrage funds?
• What are the first and second-order effects of tax changes on arb funds?
• What risk-free or low-risk investment options are available in the likely new tax environment?
• How significant is the presence of arbitrage funds in the stock market, and what does it mean for overall market volumes?

Join us as we unravel the complexities of arbitrage mutual funds and gain a deeper understanding of their implications for your investment strategy.

Show Notes & References

01:00 What do arbitrage funds (arb funds) do and where they fit in your investment portfolio?

08:30 Why didn’t arb funds become the FD replacement?

12:30 How big are arbitrage funds and what does that mean as a percentage of total volumes/positions on the stock market?

18:45 Arbitrage Funds are a huge part of our market and it's a problem. Why?

21:30 First and Second order effects of taxing arb funds like debt

34:00 What are the advice or takeaways?

If you have any feedback, ideas for future topics, or questions, we'd love to hear from you. Send us an email at podcast[at]capitalmind[dot]in.

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