Arbitrage Funds can help you to tide over volatility!

Last updated: 06 Jul, 2020 | 05:29 pm

Arbitrage Funds can help you to tide over volatility!

What are arbitrage funds?

  • Arbitrage funds typically have about 70 – 80% of their portfolio invested in equity, cash and futures and about 20 - 30% in short term debt instruments.
  • The primary source of income for an arbitrage fund is to earn income from buying a stock and simultaneously selling a futures contract of the same security. Hence, the transaction has no market risk and the fund earns by locking in the difference of the price between the stock and that of its corresponding future contract.

Are Arbitrage Funds safe?

  • Amid high volatility in the market, an Arbitrage Fund could be a safe place to park your money as they have very low risk due to their hedged position. 
  • With increasing volatility, arbitrage funds will give the best possible post-tax return on a short-term basis. These funds have outperformed all other safe havens on a post-tax basis in a highly volatile market. 

 INDwealth Analysis

The below chart shows post-tax returns for Liquid Funds, Arbitrage Funds and Bank FDs, assuming highest tax bracket of 42.74%.

  • Arbitrage Funds are treated like equity mutual funds for taxation purposes. Accordingly, short-term capital gains are taxed at 15%. STCG from Liquid Fund/ Bank FD are added to income and taxed at a marginal rate of 42.74%

Explore INDwealth’s top-rated Arbitrage Fund-- Kotak Equity Arbitrage Fund-- by clicking on Continue

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