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A few select mutual funds focus investing on merger arbitrage. Among these are the Merger Fund, the Arbitrage Fund and the Gabelli ABC Fund.

Merger Arbitrage Funds

Merger arbitrage funds have a mostly positive reputation for providing consistent returns on investment. One advantage is that such funds tend to perform equally well in bull or bear markets. These funds are good for providing diversification for growth investors. They may be considered a bit too speculative for very conservative investors. Owning merger arbitrage funds in a tax-deferred investment plan can be advantageous, because these funds commonly have high portfolio turnover rates that can generate capital gains taxed at relatively higher rates.

Three Funds

The Merger Fund (MERFX), with an asset base of $1.8 billion, focuses primarily on large deals. The fund primarily seeks out target companies with a market capitalization value of at least $300 million. This fund’s top holdings include Time Warner Cable, Allergan Inc. and DirecTV. The fund offers a dividend yield of 2.3% and has a relatively low expense ratio of 0.3%.

Another leading fund in this category is the Arbitrage Fund (ARBFX). The fund has approximately $470 million in assets and often invests in deals the Merger Fund does not. It has a wider scope of deals to be made as it buys shares from target companies with market values below $10 million. The fund generally avoids hostile deals and leveraged buyouts. Among the fund’s top holdings are DirecTV, Family Dollar Stores Inc. and CareFusion Corporation. The expense ratio for this fund is approximately 1.5%.

The Gabelli ABC Fund (GABCX) is a nonpartisan fund engaging in merger arbitrage. The fund also purchases convertible securities and value stocks. At times, it holds large cash stakes. The fund is known for experiencing very low volatility. Top holdings include Salix Pharmaceuticals LTD, Hospira Inc. and Zale Corporation. The fund’s dividend yield is 0.45%, and its expense ratio is 0.6%.

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