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Best Arbitrage funds are a type of mutual fund that uses the price differential between the cash and derivatives markets to produce returns. It follows a strategy of simultaneously buying and selling securities in the cash and futures markets. The return you get depends on the volatility of the assets. We have covered the following in this article on the best arbitrage funds.
The word ‘arbitrage’ means the same security is bought and sold in different markets to profit from the price difference. It exploits inefficiencies in the markets to generate profit for the investors. It helps you profit from the market without taking too much risk in your investment. Arbitrage funds invest most of the corpus in equity and equity-related securities. However, they also invest in short-term debt securities and money market instruments. You may consider investing in arbitrage funds with a time horizon of one to three years
The table below shows the top-performing arbitrage funds based on the past 3-year and 5-year returns:
You may consider putting your money in arbitrage funds if you are comfortable with stock investments. It is a low-risk investment as compared to many equity funds. Arbitrage funds offer attractive returns at lower-risk as compared to other equity investments. You could consider investing in arbitrage funds if you fall in the higher tax bracket.
It offers the twin benefits of lower risk with tax-efficient returns if you fall in the highest income tax slab. You may consider diversifying your portfolio with arbitrage funds. It is suitable for investors looking at equity investments, but not extremely aggressive investors. You may invest in arbitrage funds to meet short-term or medium-term financial goals. It is an investment suitable for first-timers in the stock market. You could get an attractive return in a volatile market.
Arbitrage funds are considered as equity funds for tax purposes. It is because they invest at least 65% of the total assets in equity and equity-related instruments. If you sell arbitrage funds within one year, your gains are treated as short-term capital gains. You would have to pay short-term capital gains tax at 15% with applicable cess. If arbitrage funds are sold after one year, you will incur long-term capital gains tax at 10%.
It is only on the capital gains above Rs 1 lakh in a financial year. Arbitrage funds, either the growth or dividend option, are taxed as equity funds. However, dividends from arbitrage funds are taxable in the hands of investors depending on the income tax bracket. For example, if you are in the 30% income tax bracket, you would have to pay tax at that rate on your dividends.
Arbitrage funds invest most of the corpus in equity and equity-related instruments. However, they also invest in debt instruments when there are insufficient arbitrage opportunities. Your investment in arbitrage funds is affected by interest rate risk. It means you could suffer losses due to the change in interest rates.
However, you must also factor in credit risk, which is the risk of default on both principal and interest payments by the borrower. Arbitrage funds may face other risks. Arbitrage opportunities come in phases. You would find arbitrage opportunities in a volatile market. You also have arbitrage opportunities when stock markets peak. However, there are very few opportunities for arbitrage funds to make a profit during a stock market correction.
Arbitrage funds are risky in the short-run. You could incur an exit load if you redeem the investment within one month. You may consider investing in arbitrage funds with an investment horizon of at least one year. You could ignore arbitrage funds if you are a long-term investor. The arbitrage strategy could contain the downside risk. However, it may also limit the possibility of profit from the investment. An aggressive investor may consider putting money in other equity funds as compared to arbitrage funds.
You must consider the following points before investing in an arbitrage fund.
The following are some of the major advantages of investing in arbitrage funds.