Arbitrage Funds- ” There Lies an Opportunity at Every Turn”
What is Arbitrage Fund
Arbitrage Funds are hybrid funds that work by profiting on the difference in price between 2 markets, usually the cash market and the derivatives market. It works by purchasing stocks in the cash market and simultaneously selling it in the futures market. These funds capitalise on market inefficiencies and may profit from market volatility as it leads to a greater difference in the prices of securities in the cash and the futures market. Arbitrage Funds have a minimum 65% exposure to equities and the rest to debt and money market instruments which are done on a tactical basis. Equity Arbitrage Exposure is fully hedged (equity portion of the portfolio is covered by derivative position), with an aim to neutralise or minimise the risk associated with market volatility.
Benefits of Arbitrage Funds :
Low Risk Vis- A- Vis Pure Equity Funds
Arbitrage Funds are generally considered to be low risk funds as each security is bought and sold simultaneously, there is very little risk involved when compared with other long-term equity investments. They also invest a sizeable portion of its assets in debt and money market instruments making them relatively stable.
Taxation
Arbitrage Funds are hybrid funds which invest a minimum 65% in cash and derivative segments of equity markets and the rest in debt and money market instruments, hence are taxed as equity funds. This gives them an advantage over traditional fixed income avenues and debt funds in terms of taxation with a relatively lower risk to pure equity funds as mentioned. If held for less than one year, then any gains are treated as STCG (Short Term Capital Gain) and taxed at 15% and if held for more than 1 year, they are treated as LTCG (Long Term Capital Gain) and taxed at 10%, if the capital gains exceed `1 lakh in a financial year.
Illustration of Arbitrage Funds with other Debt Instruments
Arbitrage Fund -Growth Option | Liquid / Debt Fund |
Bank FDs | Bank Savings A/c | |
Investment Amount (`) | 10,00,000 | 10,00,000 | 10,00,000 | 10,00,000 |
Illustrative Returns (%) | 5.50%^ | 5.50%^ |
5.50%# | 2.75% |
Pre-Tax Gains after 1 year ( `) | 55,000 | 55,000 | 56,145 | 27,785 |
Applicable Tax Rate (%) | 10.40% | 31.20% | 31.20% | 31.20% |
Applicable Tax Head | LTCG | STCG | Income | Income |
Applicable Tax ( `) | 5,720 | 17,160 | 17,517 | 8,669 |
Post Tax Gains ( `) | 49,280 | 37,840 | 38,628 | 19,116 |
Post Tax Returns (%) | 4.93% | 3.78% | 3.86% | 1.91% |
Returns shown for Arbitrage Fund and Liquid / Debt Fund are for illustrative purposes only and actual returns may vary based upon prevalent market conditions and rates.
Kindly contact Mr Rahul Kapadia on +91 9819747686 for any further queries.
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