Planyourworld What are Arbitrage funds & Benefits
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Arbitrage Funds

 Deepak Singh  10-11-2017   02-12-2017

 Arbitrage Funds 

Arbitrage Funds

In the present time of uncertainty, it is quintessential to set financial goals well in advance of kids’ education to vacation planning to a retirement plan. Thefinancial planning tells us about how much money to save, where to invest and how to plan these investments and their returns etc. It serves as the roadmap to accomplish the desired financial goals in life.

With the growing scope of Financial planning and Investment Planning, the investors who wish to invest in mutual funds with minimum risk and equity like taxation, arbitrage funds is seemingly an adorable solution for them.

What are Arbitrage funds?

Arbitrage funds are the mutual funds with low-risk buy-and-sell opportunities. It makes the most of the price differential in the derivatives market and cash market that helps in generating optimal returns. The fund buys shares simultaneously in the cash segment and sells them in derivative segment of the same company in the future. It is keeping in mind futures trading at an equitable premium. As every month comes to an end, the future and cash price coincides thereby generating returns. It is imperative to note that as each purchase in the cash market corresponds with the sale transaction in the futures market, the funds do not take a literal equities exposure. Money in these funds is made by taking advantage of buy and sell opportunities with a lower degree of risk available in the future and cash market. Moreover, there is a similarity with the risk profile of a debt fund. Many arbitrage funds set their benchmark with CRISIL Liquid Fund Index.

Why investing in Arbitrage Fund is a better idea?

Arbitrage Funds are primarily suitable for people with low-risk appetite. In past three years, the inflow of money   in these funds has remarkably high. The major reason behind this inflow of moneywas an increase in the debt fund’s long-term holding period from one to three years. Arbitrage Funds are considered as equity funds as they maintain an average 65 percent exposure to equity. Their long-term capital gain holding period is one year. This gain from equity is tax-free, and the income as a dividend from equity doesn’t come under the purview of dividend distribution tax. This has been another factor that has attracted investors. 

The returns or gains from arbitrage funds largely depends on available arbitrage opportunities between the future market and spot market. In bull markets, there are greater opportunities seen. In this segment, as the assets under management increases, the money will be chasing similar opportunities. On an average, the returns from this fund have been somewhere around 6.91 percent.

Features of Arbitrage Funds at a glance

The features that make arbitrage fund stand apart from other funds are-

  1. Tax-Free Returns after a year or Equity Taxation Benefit
  2. Comparable Returns with Debt or Liquid Funds
  3. Low-risk investment but short-term volatility higher
  4. Tax-Free Dividends as it is considered as Equity Funds
  5. No Dividend Distribution Tax applicable

Advantages of Arbitrage Fund

Low-Risk Investment

High volatility in markets deters a lot of people from investing in equity schemes. Here, it is important to understand that as the volatility of market increases, so does the opportunities in for arbitrage. This makes them a good option for investing in volatile markets. Since there are pre-determined profits, the funds have minimal risks. This is the perfect investment option for all those who do not wish to take higher investment risks because of market volatility.

Equity Taxation Benefit

Another major benefit of investing in arbitrage funds is its equity taxation benefit. Capital preservation feature of these funds coupled with minimal risk is a feature that resembles debt funds, but since it is an equity scheme, investors enjoy equity taxation benefit and the profits generated from the scheme are exempted from tax if held for more than one year. This feature gives arbitrage funds an edge over other debt funds that have to bear long-term 20 percent capital gain tax with indexation and minimum three years holding period.

Short-term investment

A proxy to liquid funds, arbitrage funds offer a lot of benefits and to avail them, it is recommended for the investor to stay invested for one year. Arbitrage funds are perfectly suitable for those who want to make investments for a short term.

Expected Returns

Pre-determined profits from these funds and the ability to earn more profits as per price difference availability of securities in different markets range from 6 percent to 7 percent. If you would like to get such returns with minimal risk, do not hesitate to invest your surplus cash and enjoy the benefit of taxation. 

Disadvantages of Arbitrage Funds

In reality, the number of arbitrage opportunities is very less, and those that are there can prove to be beneficial when an investor has the latest technology in hand to take quick positions. Moreover, they also need necessary expertise in making quick transactions that are possessed only by experts in this field.

It is important to consider all the factors, pros and cons of investing in arbitrage funds to make a well-informed investment decision.

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