The Indian markets are volatile these days, and typically after a good run-up, we also feel a sort of dry spell. Similarly, the market also experiences a pause in its pace and becomes volatile, trading within a range. This can leave investors feeling confused about the market’s next move.
If you’re experiencing the same sentiments amidst the current market scenario and are seeking an ideal fund for investment, then this article is for you. In this article, we are going to explore arbitrage funds, so let’s get started.
Arbitrage Funds are a unique type of equity-oriented hybrid funds designed to take advantage of arbitrage opportunities in the market. These opportunities may arise from various scenarios, such as pricing mismatches between different exchanges or disparities between spot and futures market prices. The strategy involves the fund manager executing simultaneous buy and sell orders for shares, profiting from the price differences.
In managing an arbitrage fund, the fund manager selectively invests in equities when viable arbitrage opportunities are identified. However, in the absence of such opportunities, the fund reallocates its investments to short-term money market instruments and debt securities.
Within the realm of Hybrid Schemes, there exist six distinct categories. Interestingly, Arbitrage funds constitute a significant portion of the total monthly inflows. On average, these Arbitrage funds contribute 65% to 70% of the net inflows in overall hybrid schemes. This data is sourced from the AMFI website.
Less Risky: Arbitrage funds typically entail minimal risk for investors. Because each security is bought and sold simultaneously, there is essentially no risk associated with longer-term investments. Additionally, arbitrage funds may allocate a portion of their capital to debt instruments, which are generally considered fairly stable. During periods of limited attractive arbitrage opportunities, funds may increase their exposure to debt. This aspect of investment makes arbitrage funds particularly appealing to investors with low-risk tolerances.
Taxed as Equity Funds: Arbitrage funds are considered as equity funds for tax purposes 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%. If arbitrage funds are sold after one year, you will incur long-term capital gains tax at 10%.
| Scheme Name | AUM
Rs Cr |
Return % |
|||||
| 1W | 1M | 3M | 6M | 1Y | 2Y | ||
| Invesco India Arbitrage Fund – Growth | 14,592.95 | 0.14% | 0.63% | 2.20% | 3.77% | 7.65% | 6.66% |
| SBI Arbitrage Opportunities Fund – Regular Plan – Growth | 27,798.09 | 0.15% | 0.63% | 2.21% | 3.72% | 7.72% | 6.47% |
| Kotak Equity Arbitrage Fund – Growth | 39,099.34 | 0.13% | 0.66% | 2.33% | 3.89% | 7.82% | 6.46% |
| Edelweiss Arbitrage Fund – Growth | 8,768.07 | 0.04% | 0.55% | 2.22% | 3.70% | 7.54% | 6.23% |
| HDFC Arbitrage Fund – Wholesale – Growth | 10,993.68 | 0.14% | 0.63% | 2.22% | 3.77% | 7.55% | 6.20% |
| ICICI Prudential Equity – Arbitrage Fund – Growth | 17,500.04 | 0.16% | 0.63% | 2.22% | 3.68% | 7.51% | 6.17% |
I hope this article gives you a good understanding of these funds and that you find them interesting. That’s because they aren’t like your typical mutual funds. Unlike other funds, arbitrage funds place large orders and capitalize on price differentials for the same security in different markets. This allows investors to profit from market volatility without taking on too much risk. It’s important to understand that the potential profit margins from arbitrage opportunities are often small. As a result, the fund manager may need to execute numerous trades within a single day to realise a meaningful profit, which attracts significant transaction costs, eventually impacting the net profit. Individuals looking for short-term to medium-term investments may consider these funds.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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