- Date : 01/06/2023
- Read: 4 mins
If you are looking to invest in the safety of arbitrage mutual funds, here are your choices.
Arbitrage is the financial benefit that can be gained by taking advantage of the price difference that exists between two different markets, for the same product. When multinational companies set up their outsourcing subsidiaries in another country, they try to tap the arbitrage benefits that arise because of the cheaper manpower or raw materials in the foreign country.
Arbitrage can exist even in the case of equities. There can be differences in the price of equity in different markets, and there remains an opportunity to tap it. That’s what arbitrage mutual funds do.
The recommended Arbitrage Mutual Funds to invest in India in June 2023 include the Invesco India Arbitrage Fund, giving you 6.14% returns in a year, the SBI Arbitrage Opportunities Fund, which gives 5.95% returns, the Kotak Equity Arbitrage Fund with 5.75% returns, the HDFC Arbitrage Fund with its one year returns of 5.62%, etc.
Best arbitrage mutual funds for investment in India
What are arbitrage mutual funds?
Arbitrage mutual funds are hybrid funds and are equity-oriented. The fund manager of an arbitrage mutual fund looks for differences in price between different exchanges, and also similar differences in the spot and futures market. The arbitrage is gained by buying and selling the share simultaneously in the two different markets and pocketing the difference.
How do arbitrage mutual funds work?
Let us assume that the price of a stock is Rs 100 in the cash market and Rs 102 in the futures market. The fund buys the stock from the cash market and sells the same quantity in the futures market. The position is reversed before the expiry of the future series while trying to maintain the Rs 2 per share arbitrage.
Why should arbitrage mutual funds be bought?
With securities bought and sold simultaneously, arbitrage funds are low-risk investments. In absence of arbitrage opportunities, capital is invested in debts, giving stable returns. As such, arbitrage mutual funds are ideal for investors who have a low risk tolerance or want to invest a portion of their funds in safe fund schemes.
Is it safe to invest in arbitrage funds?
Arbitrage funds are a safe option for investors who are looking to have equity exposure but also want to limit their exposure to the risk associated with the same. Arbitrage funds are ideal for investors with a low risk appetite to park their surplus money, particularly if the market is experiencing fluctuations.
Can you lose money on arbitrage funds?
It is unlikely to make huge gains or huge losses in arbitrage mutual funds as they maintain a safe position while trading. So, a cautious investor who wants to earn from a volatile market can do so safely through these funds.
Is investing in arbitrage funds risky?
Arbitrage merely uses the price gap in any stock, commodity, or currency in two markets. It involves buying at a given price and simultaneous selling in the other market at a higher price. As the item is not held for long, there remains an opportunity for a risk-free profit for the fund manager.
Are arbitrage funds tax-free?
No, arbitrage funds are treated as equity funds for taxation. Therefore, they become a long-term capital asset after one year. Investors holding arbitrage funds for less than a year have to pay 15% in short term capital gains tax. If they sell after a year, they pay a long term capital gains tax of only 10%.
What are the common disadvantages of arbitrage mutual funds?
A main drawback is that these funds are only moderately reliable. If the market is stable, arbitrage mutual funds don’t stand to be very profitable. They prosper enough only when profitable arbitrage trades are available. Long-term stability can reduce their profitability. These funds generally don’t perform as well as other actively managed equity funds.
How much returns has arbitrage mutual funds shown in recent times?
In the last year, the average return of 17 arbitrage mutual funds in India stood at 4.52%. Of these, 13 have operated for five or more years, and have averaged 6.03% in five years.
Are arbitrage mutual funds safer than debt funds?
Investors who like arbitrage mutual funds consider them to be safer than debt products. Credit risk, which is common in debt products, is not present in arbitrage mutual funds. As it is considered an equity mutual fund, the tax on its returns is lower. The capital gains tax charged on debt funds is higher. Besides, the definition of short-term is three years in the case of debt funds, whereas arbitrage mutual funds qualify for the lower rates of long-term capital gains tax after a year’s holding.
Arbitrage is the financial benefit that can be gained by taking advantage of the price difference that exists between two different markets, for the same product. When multinational companies set up their outsourcing subsidiaries in another country, they try to tap the arbitrage benefits that arise because of the cheaper manpower or raw materials in the foreign country.
Arbitrage can exist even in the case of equities. There can be differences in the price of equity in different markets, and there remains an opportunity to tap it. That’s what arbitrage mutual funds do.
The recommended Arbitrage Mutual Funds to invest in India in June 2023 include the Invesco India Arbitrage Fund, giving you 6.14% returns in a year, the SBI Arbitrage Opportunities Fund, which gives 5.95% returns, the Kotak Equity Arbitrage Fund with 5.75% returns, the HDFC Arbitrage Fund with its one year returns of 5.62%, etc.
Best arbitrage mutual funds for investment in India
What are arbitrage mutual funds?
Arbitrage mutual funds are hybrid funds and are equity-oriented. The fund manager of an arbitrage mutual fund looks for differences in price between different exchanges, and also similar differences in the spot and futures market. The arbitrage is gained by buying and selling the share simultaneously in the two different markets and pocketing the difference.
How do arbitrage mutual funds work?
Let us assume that the price of a stock is Rs 100 in the cash market and Rs 102 in the futures market. The fund buys the stock from the cash market and sells the same quantity in the futures market. The position is reversed before the expiry of the future series while trying to maintain the Rs 2 per share arbitrage.
Why should arbitrage mutual funds be bought?
With securities bought and sold simultaneously, arbitrage funds are low-risk investments. In absence of arbitrage opportunities, capital is invested in debts, giving stable returns. As such, arbitrage mutual funds are ideal for investors who have a low risk tolerance or want to invest a portion of their funds in safe fund schemes.
Is it safe to invest in arbitrage funds?
Arbitrage funds are a safe option for investors who are looking to have equity exposure but also want to limit their exposure to the risk associated with the same. Arbitrage funds are ideal for investors with a low risk appetite to park their surplus money, particularly if the market is experiencing fluctuations.
Can you lose money on arbitrage funds?
It is unlikely to make huge gains or huge losses in arbitrage mutual funds as they maintain a safe position while trading. So, a cautious investor who wants to earn from a volatile market can do so safely through these funds.
Is investing in arbitrage funds risky?
Arbitrage merely uses the price gap in any stock, commodity, or currency in two markets. It involves buying at a given price and simultaneous selling in the other market at a higher price. As the item is not held for long, there remains an opportunity for a risk-free profit for the fund manager.
Are arbitrage funds tax-free?
No, arbitrage funds are treated as equity funds for taxation. Therefore, they become a long-term capital asset after one year. Investors holding arbitrage funds for less than a year have to pay 15% in short term capital gains tax. If they sell after a year, they pay a long term capital gains tax of only 10%.
What are the common disadvantages of arbitrage mutual funds?
A main drawback is that these funds are only moderately reliable. If the market is stable, arbitrage mutual funds don’t stand to be very profitable. They prosper enough only when profitable arbitrage trades are available. Long-term stability can reduce their profitability. These funds generally don’t perform as well as other actively managed equity funds.
How much returns has arbitrage mutual funds shown in recent times?
In the last year, the average return of 17 arbitrage mutual funds in India stood at 4.52%. Of these, 13 have operated for five or more years, and have averaged 6.03% in five years.
Are arbitrage mutual funds safer than debt funds?
Investors who like arbitrage mutual funds consider them to be safer than debt products. Credit risk, which is common in debt products, is not present in arbitrage mutual funds. As it is considered an equity mutual fund, the tax on its returns is lower. The capital gains tax charged on debt funds is higher. Besides, the definition of short-term is three years in the case of debt funds, whereas arbitrage mutual funds qualify for the lower rates of long-term capital gains tax after a year’s holding.
