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Arbitrage Funds
An equity-oriented hybrid mutual fund known as a “India Arbitrage Fund” capitalises on the price differences between assets traded on two distinct marketplaces to generate profits. The securities are purchased in the cash market for less price and sold on the futures market for more price. The arbitrage benefit makes up the gap. As a result, arbitrage funds benefit in a volatile market.
Who should invest?
- Arbitrage funds are a good option for investors with minimal risk tolerance since there isn't much price differential when markets are stable, therefore there isn't much opportunity for profit or loss. However, arbitrage funds profit from volatility when markets are unsteady.
- Despite the fact that there are other low risk investing alternatives available, this fund is best for individuals who wish to take reasonable risks while still benefiting from a market that is very volatile.
- Hence if one wants to opt for any mutual funds for short to medium term duration can go for arbitrage funds.
- These funds are subject to equity fund taxation. If an investor withdraws money from an equity fund within a year of investing and has generated a capital gain of ₹50,000, a 15% short-term capital gains tax will be assessed. The amount of tax due is 7,500.
- In addition, a 10% Long Term Capital Gains Tax would be assessed on ₹50,000 if an individual withdrew their investment after 1 year of investing in an equity fund after realising a capital gain of 1.5 lakh rupees, 1 lakh is not subject to taxes. The amount of tax due would be ₹5,000.
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