WHAT ARE ARBITRAGE FUNDS?
Arbitrage funds or arbitrary funds are the ones which take advantage of the price differential between future and cash markets. They mainly work on the mispricing of shares which are mostly equity and generate great returns. The funds are bought simultaneously and sold in the derivatives or future markets. The returns are the margin between CP and SP i.e. Cost Price and Selling Price.
HOW DO ARBITRAGE FUNDS WORK?
A simple way to understand the operation of arbitrage funds is to see it as buying funds at a lower price in one market and selling them at a comparatively higher price in the other market. This price difference makes the profit.
For example, A company XYZ’s stocks are trading at Rs. 2000 in cash market and at Rs. 2500 in the future market. So, if an investor buys XYZ’s stocks in the cash market and sells them in the future market, he makes a profit of Rs. 500 per share.
Arbitrage funds, unlike other funds, benefit the most when markets are volatile.
ARE ARBITRAGE FUNDS SAFE?
Yes, they are quite safe and carry a little risk. Hedging done by fund managers reduces the risk of equities against the derivatives. As generally perceived, market volatility is a risk but that is not the case with arbitrage funds. Rather, they generate better returns when the markets are volatile. Market stability is a situation of concern, in fact.
ARE ARBITRAGE FUNDS TAX-EFFICIENT?
The tax-efficiency of arbitrage funds is quite impressive. If the equity holdings are over and above 65% in the cash market, they are considered as equity funds which bring along great tax benefits. If you hold these funds for more than one year, then the returns generated on them are tax-free. However, in the short-term, the returns might be taxed at 15% within the first 12 months.
WHO SHOULD GO FOR ARBITRAGE FUNDS?
People with low to moderate risk appetite should go for arbitrage funds. The risk profile of these funds can be compared to that of debt funds. Crisil BSE 0.23% liquid fund Index is used as a benchmark by a lot of arbitrage funds.
They are a win-win case for investors who wish to trade in equity markets but have a very small risk appetite. They are an excellent option for people to have income at disposal and want to invest during market volatility.
COMPARING ARBITRAGE FUNDS TO BANK FDS AND LIQUID FUNDS
Arbitrage funds can fetch nearly 6-9% returns while bank FDs stand at 8-9% and liquid funds at 6-8%. The additional advantage to arbitrage funds is that the return from these funds after one year is tax-free. The returns from FDs and Liquid funds are taxed as per slab applicable.
Premature withdrawal from arbitrage funds attracts a penalty of 0.25-0.50% in the first 3-6 months. FDs charge a hefty 1% penalty on premature withdrawal. There is no penalty in case of liquid funds in premature withdrawal.
Arbitrage funds can take time between three to five days for redemption whereas FDs can be redeemed in a span of two days and liquid funds, the next working day.
HOW TO INVEST IN ARBITRAGE FUNDS?
Investing in arbitrage funds is very easy with Piggy. Just follow these simple steps:
1. Login at www.piggy.co.in
2. Key in your details and get your KYC verified
3. Invest in the fund of your choice from a wide variety.
Here are a few options from the many available in arbitrage funds:
1. SBI arbitrage opportunities fund direct
2. IDFC Arbitrage Fund- direct plan
3. Reliance Arbitrage fund- direct plan
4. DHFL Pramerica Arbitrage Fund direct Plan
5. L&T Arbitrage Fund Direct
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