Arbitrage Mutual Funds

What are the features of Arbitrage Funds?

• Minimum 65% allocation in equity arbitrage opportunities

• The volatility risk is quite low, while returns are good

• Suitable for all investment horizons

• Invest through SIPs or lump sum

• Earn tax-free returns up to Rs.1 lakh if you stay invested for 12 months or more

What are the different types of hybrid funds?

How do Arbitrage Funds work?

• Arbitrage Funds collect investments from different investors and pool them into a corpus

• Fund managers identify arbitrage opportunities in the equity market

• Arbitrage opportunities are when the price of an equity security is different in the spot or cash market and the futures or derivatives market

• For instance, a share trading at Rs 400 in a spot market and Rs 410 in a futures market creates an arbitrage opportunity

• The fund manager can buy the security at Rs 400 from the spot market and sell it at Rs 410 in the futures market to make a profit of Rs 10

• Depending on the profit made through arbitrage opportunities, the value of the portfolio rises

• Risks are low since the price across the spot and futures market would differ even in a bearish market. Thus, fund managers can use this differential to make a gain

What is the tax implication of Arbitrage Funds?

• Arbitrage attract equity taxation on the capital gains earned since they primarily invest in equity arbitrage opportunities

• Returns up to Rs.1 lakh are tax-free if you stay invested for 12 or more months

• Returns exceeding Rs.1 lakh are taxed at 10%

• For redemption within 12 months, returns are taxed at 15%

• Dividends earned, if any, are taxed at your income tax slab rate

What are the payout options?

• Dividend option

  Earn dividends on your investment at regular intervals

• Growth option

  Accumulate the returns over the investment tenure and get a lump sum amount on redemption

Who should invest in Arbitrage Funds?

• New equity investors

  You can benefit from the low volatility risk and enjoy stable returns

• Investors looking to invest in equity

  If you want to invest in equity at a reduced risk, the Arbitrage Fund will be a good choice.

• Investors with a short-term investment horizon

  If you want to invest for a short tenure, Arbitrage Funds can give better returns and tax efficiency than liquid funds