Your Arbitrage Fund Returns Will Fall by About 0.5% Next Year Due to Increased STT
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Deepak Shenoy, CEO of Capitalmind Asset Management, has raised concerns about the impact of the recent increase in Securities Transaction Tax (STT) on arbitrage mutual funds. According to him, investors can expect a reduction in returns by approximately 0.5% over the coming year as a direct consequence of this tax hike.
Impact of STT on Arbitrage Fund Returns
– Reduction in Returns: The increase in STT is projected to cut returns for arbitrage funds, which are heavily involved in the futures market.
– Importance of Cost Efficiency: Arbitrage strategies rely on narrow profit margins and low execution costs. Even a slight increase in transaction costs can significantly affect overall performance.
– Statements from Shenoy: He emphasized via social media that, while the STT increase may have minimal impact for retail traders, it poses a more substantial challenge for arbitrage funds, which are major players in the futures market.
– Foreign Portfolio Investors (FPIs): Shenoy highlighted that FPIs often opt for futures to buy stocks as it typically carries lower transaction costs than cash markets. However, this change in STT raises costs by 4 basis points in futures markets.
Additional Insights
– Comments from Atul Shinghal: The Founder and CEO of Scripbox noted that the 150% hike in STT on the futures leg of trades limits arbitrage opportunities. This could result in net returns declining by 0.20% to 0.40%, thus reducing the attractiveness of these funds as a low-risk investment option.
– Retail Investor Perspective: Shenoy reassured that for individual investors, transaction costs represent a small fraction of long-term results. Therefore, this tax hike may not significantly alter their trading behavior.
– Market Dynamics: Most other aspects of STT remain unchanged, suggesting that the broader market’s structure and functioning will continue without major disruptions.
Conclusion
In summary, as Deepak Shenoy points out, the increased STT will likely lead to diminished arbitrage fund returns, estimated to fall by about 0.5% next year. While retail investors may not feel a major impact, the changes will undoubtedly affect the profitability of these funds, making it essential for investors to consider the evolving landscape of mutual fund investments.
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