Arbitrage funds are those mutual funds which simultaneously buy and sell stocks and securities in different markets. Such a transaction comprises very low risk with a stable income, making it a feasible choice for beginners in the mutual fund investment journey.
Stable performance of funds
Low risk investment
Tax efficient returns on equity
Suitable for a moderate investment horizon
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AUM ₹17729 Cr •
Expense 0.37%
AUM ₹40051 Cr •
Expense 0.43%
AUM ₹9167 Cr •
Expense 0.35%
AUM ₹27586 Cr •
Expense 0.42%
AUM ₹13896 Cr •
Expense 0.37%
AUM ₹10755 Cr •
Expense 0.3%
AUM ₹3931 Cr •
Expense 0.31%
AUM ₹10549 Cr •
Expense 0.34%
AUM ₹1451 Cr •
Expense 0.11%
AUM ₹17729 Cr •
Expense 0.3%
AUM ₹5768 Cr •
Expense 0.36%
AUM ₹4549 Cr •
Expense 0.38%
AUM ₹3810 Cr •
Expense 0.34%
AUM ₹10882 Cr •
Expense 0.42%
AUM ₹10882 Cr •
Expense 0.42%
AUM ₹784 Cr •
Expense 0.38%
AUM ₹2012 Cr •
Expense 0.27%
AUM ₹143 Cr •
Expense 0.31%
AUM ₹156 Cr •
Expense 0.41%
AUM ₹115 Cr •
Expense 0.38%
Arbitrage mutual funds are known to be open-ended investment schemes where a minimum of 65% of the money is invested in equity and equity-related assets. Here, securities, stocks or derivatives are simultaneously bought and sold in different segments of the market. Risk is very low in such transactions as the stocks are bought where the price is low and sold simultaneously in the market where the price is high.
You can get different opportunities for arbitrage transactions, such as exchange arbitrage, cash and carry arbitrage and index and basket of stocks arbitrage. With the help of buying in the cash market and selling the same in the Futures & Options market, you tend to lock in your profit. Hence, irrespective of any price movements, your earnings remain secured.
Let us keep reading to learn more about arbitrage funds.
As an investor, it is important to know the advantages of investing in arbitrage funds in mutual funds. Let us look at some of them.
Low Risk
Arbitrage mutual funds look to buy equities at a low price and sell them at a high price. As the buying and selling happens immediately, the profits are guaranteed. Fluctuations in the stock market won’t lead to a loss. It will increase or decrease the profits. Thus, arbitrage funds carry much less risk compared to other mutual funds.
Benefit of Volatile Markets
Volatile stock markets can be very good for arbitrage mutual funds. The gap between the stock price and the futures market presents an opportunity for profit maximisation. If the stock market is volatile, the fund manager will have opportunities to buy and sell equities for greater profits. It is one of the few mutual funds which thrives in a volatile market.
Taxed as Equity Funds
In terms of taxation, an equity arbitrage fund gets the same treatment as an equity fund. Depending on the maturity period, short-term or long-term capital gains taxation rules will be applied, that is, 15% and 10% respectively.
An investor always aims to invest their money based on their financial capability and future goals. Hence, before you decide on investing in arbitrage mutual funds, make sure you are one of those who actually should consider putting money into it. Check the pointers to know more.
Minimal Risk Takers
Are you scared of market risks? Then you can invest in arbitrage mutual funds. Though these funds benefit from market volatility, the investors are not hurt by it. Thus an investor can park their money in it for 3-5 years to get reasonable returns.
Confident with Volatile Markets
An investor always looks at the market conditions while making investment decisions. In most cases, volatile markets are not preferable. But the good thing about arbitrage mutual funds is that they thrive exactly in such situations. If you think the markets are volatile, then maybe you can put some money in an arbitrage fund.
Having Short to Medium Investment Horizon
Arbitrage mutual fund returns are good if you want to invest for at least a few years. In case you have a moderate investment horizon, that is for 3 to 7 years and get stable returns, then this mutual fund will be a feasible option.
Here are some factors to consider before investing in arbitrage mutual funds.
Risk
If your risk appetite is low, then you can consider investing in arbitrage mutual funds. Though they invest in equities, the fund itself is not exposed to market risks. Thus the profits are secure. However, as more people invest in these funds, the gap between the futures and the stock market can shrink further, thus cutting the profits.
Investment Cost
Due to multiple transactions of equities, arbitrage mutual funds charge a high fee or expense ratio. To boost your returns, go for a choice which has a minimum expense ratio.
Investment Horizon
Arbitrage mutual funds are best if you want to invest for the short to medium term. You can earn higher returns than bank deposits. So you have to ask yourself how long you want to invest.
Returns
These funds can earn moderate returns of 7-8% over 5-10 years. This makes it ideal for conservative investors.
Tax
Arbitrage mutual funds are taxed the same way as equity funds. Holding it for up to 1 year invites short-term capital gains tax. Long-term capital gains tax is applicable for holding it for more than 1 year. Plus, there is a tax exemption if the long-term capital gain is less than Rs. 1 lakh.
Past Performance
Studying the history of a mutual fund will tell you how good or bad an investment option it is. You can also use it to compare it with other options.
Fund Manager
The fund manager in charge of your investment should be someone with success under his belt. This will give you peace of mind as well.
Now we will go through some of the disadvantages of arbitrage mutual funds.
Limited Growth Potential
Arbitrage mutual funds don’t provide a significantly large return. They are a safe investment best suited for moderate returns. They may be better than bank deposits but other mutual funds can create better results. If the gap between the stock and the futures market decreases, the returns fall further.
Cost of Investment
A good arbitrage fund makes money with a large number of transactions. This leads to an increase in the expense ratio. The exit load can also be fairly high. It can cut down the arbitrage mutual funds returns.
Unpredictability
As arbitrage mutual funds thrive on market volatility, it can be difficult to predict the returns. Moreover, a stable market is not good from the point of view of profitability.
Hooked on the idea of investing in arbitrage mutual funds? Then let us explore the different ways in which you start your investment journey in these funds with INDmoney.
Step 1
Download the INDmoney app and create your free investment account by completing your KYC ( Know Your Customer).
Step 2
Once your Free investment account is ready, you can either search for Arbitrage Mutual Funds or go to the mutual fund section and tap on Hybrid Funds Catalog.
Step 3
Choose an Arbitrage Mutual Fund by looking at aspects like past returns, volatility, downside capture ratio, AUM, Expense ratios and underlying stocks and sectors.
Step 4
Step 5
Choose the amount that you want to invest as SIP or LumpSum.
Step 6
You must judge your goals to decide if arbitrage mutual funds are good for you. If you are looking for moderate returns with almost no risk, then you can go for it. But taking more risks may give you better returns too. So a lot depends on your financial plans and goals, and the fund you are investing in. To get more insight on different types of mutual funds schemes, visit INDmoney website or download our app to compare your investment options.
You can go to the INDmoney website to consider the best options. Ultimately, it depends on your goals, abilities and risk appetite.
They are taxed in the same way as equity funds. Short-term capital gains tax is applicable on holding them for up to 1 year. Long-term capital gains tax is applicable for holding them for more than 1 year.
As they are meant for short to medium-term investments, you can consider investing for 3-10 years.
They are safer than most mutual funds. They tend to thrive in times of market volatility.
You can expect moderate returns.
Some of the factors worth considering are:
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