Arbitrage Funds: Investors have many options to earn money from the stock market, in which there is an arbitrage fund, towards which the attraction of investors is increasing rapidly. Arbitrage is taking advantage of the difference in the price of a security. Have you ever noticed that the prices of some stocks are not the same on NSE and BSE, but there is some difference between them. Sometimes this difference is even of a few rupees, which can be taken advantage of to earn risk-free profits. Arbitrage funds work on the difference in the price of equity shares in the spot and futures markets. For this, the fund manager buys shares in the cash market now and then sells it in the futures or derivatives market. The difference between the cost price and the selling price is the return on investment.
Understand Arbitrage Fund with examples
- Suppose the shares of a company ABC are at a price of Rs 1220 in the cash market and Rs 1235 in the futures market. The fund manager will buy ABC shares in the cash market for Rs 1220 and short the futures contract for Rs 1235. When the price is met at the end of the month i.e. expiry, the fund manager will sell the shares in the futures market and make a risk-free profit of Rs 15 per share (including transaction cost). Conversely, if the fund manager estimates that its shares may weaken, he will take a long position in the futures market. He will short-sell the shares of the company at Rs 1235 in the cash market and buy the shares at Rs 1220 in the futures market to cover up his position on expiry. There will be a profit of Rs 15 on this.
- Apart from this, another example is that the fund manager will buy an equity share of Rs 100 on the National Stock Exchange (NSE) and then sell it on the Bombay Stock Exchange (BSE) for Rs 120. In this buying and selling, investors get risk free returns. There is a difference in the price of some stocks on NSE and BSE, which can be taken advantage of.
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Investing in arbitrage funds is better for these investors
- Arbitrage funds are used to take advantage of buying and selling opportunities in cash and futures markets with low risk. The level of risk in this is similar to that of a pure debt fund. These funds are ideal for investors who want equity exposure but are concerned about the associated risks. Arbitrage funds are a safe option for such investors to invest their surplus funds when the market volatility is high.
- If you have a short term or medium term financial goal, then instead of keeping money in a normal savings account, you can invest the surplus fund in an arbitrage fund. This will help in building an emergency fund and will get better returns on it.
- If you have already invested in risky options like equity funds, then you can start a Systematic Transfer Plan (STP) from equity funds to less risky ones like arbitrage funds. This will reduce the overall risk to the portfolio. However, keep in mind that the Orbitrage Fund is unlikely to have double digit returns.
- Instead of investing in pure debt funds, investing in arbitrage funds is better for those who fall in the higher rate tax slab.
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Tax Liability on Profits on Arbitrage Fund
Arbitrage funds are treated at par with equity funds in terms of taxation. If you hold the investment for less than one year, then the profit will be treated as short-term capital gain and tax will be paid at the rate of 15 percent at present. If you keep investing in this fund for more than 1 year, then the profits will be classified as Long Term Capital Gain (LTCG). If you have LTCG less than Rs 1 lakh in a financial year, then no tax is payable on it, but if the LTCG is more than Rs 1 lakh, then tax will have to be paid at the rate of 10 percent without the benefit of indexation.
Top 5 Orbitrage Funds in the Country
Fund Name – 3 Year Return
Nippon India Arbitrage Fund – 6%
Edelweiss Arbitrage Fund – 5.93 percent
L&T Arbitrage Opportunities Fund – 5.92 per cent
UTI Arbitrage Fund – 5.89 percent
Kotak Equity Arbitrage Fund – 5.88 percent
(input: cleartax.in)
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