Arbitrage Mutual Funds

Arbitrage funds is one of the mutual funds categories that aims to generate relatively stable returns by taking benefits of price difference in the different segments of the markets. These funds attract conservative investors seeking equity-like tax benefits without exposure to market risks. If you want a short-term spot for investing extra cash or a tax-efficient option over debt investments, Arbitrage Funds can be a better option.

What are Arbitrage Funds?

Arbitrage funds are a type of mutual funds that particularly makes investment in equity and equity related instruments along with hedging positions in the derivatives market. The fund manager derives higher returns by taking advantage of the price difference between the cash market and the futures market.

The fund manages the market risk by taking buy and sell positions simultaneously. This strategy aims to not benefit from the stock price movements but from the temporary price gap between different market segments.

Features of Arbitrage Funds

Here are some of the key features of Arbitrage funds mentioned below:

• Low Risk Investment Strategy: The simultaneous buying and selling of securities help in minimising exposure to market risks.
• Equity Oriented Taxation: Although the strategy is relatively conservative, these funds maintain a minimum equity exposure required to qualify as equity mutual funds for tax purposes.
• Suitable for Short Term Goals: Arbitrage funds can be considered for investment tenure ranging from a few months to a couple of years.
• Better Liquidity: Investors can sell their units anytime, subject to applicable exit loads.
• Professional Management: The funds are managed by professionals, who are monitoring market opportunities and execute arbitrage trades to generate returns.

How to Invest in Arbitrage Funds?

You can invest in Arbitrage funds by following simple process:

Step 1: Choose investment mode. You can invest through:

• AMC websites
• Online investment platforms provided by stockbrokers
• Mutual fund distributors

Step 2: Choose suitable Arbitrage fund

Step 3: Choose between Systematic Investment Plan (SIP) and Lump sum based on your goal and make investment.

Step 4: Make payment through UPI, netbanking or other available methods.

Why Invest in Arbitrage Funds?

Arbitrage Funds provides various advantages that makes them attractive for specific investor segments:

• Potential for Stable Returns: The volatility remains relatively lower as returns are generated through arbitrage opportunities than market movements.
• Tax Efficiency: Arbitrage funds come with equity taxation benefits, making them feasible for higher tax bracket investors.
• Reduced Market Exposure: The hedging strategy helps limit downside risk as compared to pure equity funds.
• Alternative to Traditional Savings Instruments: Arbitrage fund serves as a potential alternative to savings accounts, FDs or short term debt funds.

Taxation Rules for Arbitrage Funds

In India, Arbitrage Funds are taxed similar to equity mutual funds, since they are also required to invest at least 65% in domestic equities or related derivatives.

• Short Term Capital Gains (STCG): If you sell your units within one year, the gains will be considered short-term capital gains (STCG). These will be taxed at a flat rate of 20% plus applicable surcharge and a 4% health and education cess. It is worth noting that there is no basic exemption limit available for short-term capital gains.
• Long Term Capital Gains (LTCG): The gains will be classified as LTCG if you have sold mutual funds units for more than 12 months. These will be taxed at a flat rate of 12.5% without indexation benefit.