The term ‘arbitrage’ means the simultaneous buying and selling of securities in two different markets in order to gain from the price difference for the same asset. Arbitrage fund is a kind of mutual fund that is best-suited for investors looking to profit from volatile markets without taking on too much risk. Now, prior to investing in one, it is necessary to understand how they work and whether they are a right fit for your portfolio. Here is a look at everything there is to arbitrage funds:
Profits in case of an arbitrage fund are realized through the purchase and sale of securities on different exchanges. Arbitrage funds leverage the price differential in the cash and derivatives market for the purpose of generating returns. Instead of buying stocks and then selling them after the price has gone up, an arbitrage fund purchases stock in the cash market and concurrently sells that interest in the futures market.
Prior to investing in an arbitrage fund, here are some important points that investors need to take note of:
The primary responsibility of arbitrage fund managers is to buy stocks in cash and sell in futures market - the difference is what the investors get as returns. The managers therefore look to capitalize on the market inefficiencies with the intent of generating profits for the investors. The fund managers cannot short the stocks, and thus resort to look out for deals that allow buying in cash market and selling in futures. Seeking such opportunities is what fund managers involved with arbitrage funds do. The individual does not purchase shares, which he or she cannot short in futures. It should be noted that though the manager is buying and selling shares in cash and futures market, there is no risk exposure to equities, which is the case with other diversified equity mutual fund.
According to a report by The Economic Times, the top arbitrage funds to invest in India for the year 2019 are Kotak Equity Arbitrage Fund and Reliance Arbitrage Fund.
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Source: Kotak Mutual Fund
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Source: Reliance Mutual Fund
What is meant by arbitrage fund?
Arbitrage funds are a type of mutual fund that are suitable for investors looking to profit from volatile markets without taking on too much risk. Fund managers of arbitrage funds will buy stock in the cash market and concurrently sell that interest in the futures market.
How does an arbitrage fund work?
Profits from an arbitrage fund are realized through the buying and sale of securities on different exchanges. Such funds leverage the price differential in the cash and derivatives market in order to generate returns. Rather than purchasing and then selling them after the price has gone up, the fund manager will buy stock in the cash market and concurrently sells that interest in the futures market.
Which arbitrage fund is good?
According to a report by The Economic Times, Kotak Equity Arbitrage Fund and Reliance Arbitrage Fund have been listed as the top arbitrage funds to invest in India for the year 2019. Both of the funds are open ended schemes that invest in arbitrage opportunities, and their risk profile is moderately low.
Are arbitrage funds safe?
Arbitrage funds are normally considered safe, and carry little risk. The fund managers look to reduce the risk of equities by hedging against the derivatives. In the case of arbitrage funds, market volatility does not mean more risk for the investor. In fact, arbitrage opportunities exist only when the markets are uncertain or not stable.
What is an example of arbitrage?
Shares of ABC Co. Ltd. are trading at Rs. 600 each on the cash market and at Rs. 800 on the futures market. Through the buying of shares from the cash market and selling on the futures market, the profit generated is Rs. 200 per share.
How is arbitrage taxed?
Since arbitrage funds maintain an average exposure of more than 65% in equity, they are taxed just like equity funds. The tax on short-term capital gains is levied at the rate of 15%, while the tax on long-term capital gains is at the rate of 10%, without indexation benefit.