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Find out what Arbitrage Funds are and how they work.
If you invest in the securities market, you probably know of its volatile nature. As a knowledgeable investor, you may want to steer clear of such inherent volatility. However, seasoned investors know that they can take advantage of market volatility and create investment opportunities by investing in Arbitrage Funds. Read on to learn more about what is Arbitrage Funds, how it works, and its benefits.
An Arbitrage Fund is a type of hybrid mutual fund that allocates a significant portion of its assets in equity mutual funds, whereas the remaining is invested in debt instruments. In this type of investment, fund managers invest in cash and derivatives markets and leverage the price differentials to maximise returns.
The fund manager essentially analyses the price of securities in the current cash market and the futures market. If the price of securities is higher in the current market, the fund manager will purchase future marker securities and sell the equivalent quantity in the current cash market. Here, whatever the difference obtained after selling, will be the gain, less any other costs. On the other hand, the fund manager buys lower-priced securities in the cash market and forms an extended contract to sell those shares in the future market.
Since fund managers buy and sell securities simultaneously, you are secure from risks associated with long-term investments. However, frequent market fluctuations make it a slightly risky investment, ideal for moderate-risk investors.
Meant to absorb the volatility blow, Arbitrage Funds proliferate under a highly volatile market. An individual stock goes through significant fluctuations. Arbitrage Funds use this fluctuation to their advantage with fast buying and selling.
Arbitrage Funds in India offer moderate to high returns as they are hybrid funds that invest in equity and debt funds.
Arbitrage Funds are advantageous for short-to-medium term investment goals. It is an ideal vehicle to place surplus cash and earn quick returns. Ensure your goals line up with the objective of the fund.
Mutual Fund investments come with several costs, including expense ratio, entry and exit load, etc. If you wish to invest in Arbitrage Funds, you will have to bear these costs frequently.
Best Arbitrage Funds thrive on high market volatility. Oddly, if the market is not volatile enough, these funds may not be favourable.
The tax implications on Arbitrage Mutual Funds are similar to that of equity funds. Short-term Capital Gains (STCG) are gains earned on investments held for less than a year and are taxed at 15%. Long-term Capital Gains (LTCG) are gains made for investments held for more than a year. LTCG above INR 1 Lakh is taxed at 10% per cent with no indexation benefit.
Arbitrage Funds is a solution for investors with a moderate risk appetite. They provide a relatively safe avenue to place your surplus cash and earn capital gains. These Funds also take advantage of market vagaries to generate profit.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.
