Arbitrage Funds: Should you invest when the markets are high?

Are you looking for a way to make money in the stock market at low risk? Arbitrage funds may be the answer. This article explains everything you need to know about this lucrative investment option.

Arbitrage funds

In a world of uncertainty, where caution and calculated risks go hand in hand, arbitrage funds have emerged as a beacon of hope for investors seeking stability and growth. Offering a unique opportunity for reasonable returns with moderate to low risk, arbitrage funds have become the go-to choice for those who wish to navigate the volatile market with confidence. This article explains what arbitrage funds are, how they work and what factors to consider before investing in them.

  • Arbitrage funds: Low-risk, moderate returns.
  • Funds can gain even in volatile markets.
  • These are more tax efficient
  • Investors need to be cautious of exit loads.

Also ReadBest arbitrage mutual funds to invest in India

Arbitrage funds can be a safe bet for the conservative investors who want to profit from a fluctuating market with a moderate risk profile. These funds exploit the price differences between different segments of the market and offer high returns with tax efficiency. However, arbitrage funds are not suitable for short-term parking of money. They have exit loads and can be volatile on a monthly basis. Investors need to have at least a three to six-month horizon and a clear understanding of how arbitrage funds work. They also need to monitor the market conditions and the spreads regularly to make informed decisions.

How do arbitrage funds make money?

Arbitrage funds are a type of mutual funds that invest in both stocks and their futures contracts. They make money from the difference in the prices of these two. This difference is higher when the market is volatile, so arbitrage funds can give good returns even when the market is down. Arbitrage funds also have lower tax than liquid funds, which makes them attractive to investors.

Why are arbitrage funds gaining traction?

The government has made debt funds and some other non-equity funds more expensive by increasing the tax on their gains. Now, these gains are taxed at the same rate as the income of the investor, no matter how long they hold them. This has made arbitrage funds more appealing for investors. Arbitrage funds are a type of equity funds that have lower tax than debt funds. They also make money from the difference in the prices of stocks and their futures contracts. Arbitrage funds have seen more money coming in since the tax change from April 1, 2023.

Arbitrage funds attract inflows after tax change

From July 2022 to March 2023, these funds faced net withdrawals of Rs 34,678 crore. But since April 1, they have attracted net investments of Rs 13,722 crore.

Edelweiss MF predicts high arbitrage returns due to market highs, FIIs and HNIs' involvement, increased churn, and earnings season volatility.

Also Read: What are arbitrage funds? With 65% or higher equity exposure, are they safe? Who should invest in them?

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Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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