What are Arbitage funds | Things to consider while investing

Overview

Arbitrage funds work on the basis of mispricing of equity shares in the spot and futures market. It exploits the price difference between current and future securities and thus generates returns. Arbitrage funds manager simultaneously buys shares in the cash market and sells it in futures or derivatives market. The profit is the difference between cost price and selling price.

Things to consider while investing in arbitrage funds

Risk

As the Buying and selling are in the stock exchange and so there is no counter-party risk in these funds. Even when the trade is done by the fund manager in the cash and futures market, there is no risk exposure to the equities as is the case with diversified equity mutual funds. How to evaluate best equity mutual funds should be known as well.

Though, you should note that the more the arbitrage traders the fewer will be the arbitrage opportunities available. The difference between cash and the future market will disappear and there will be no sense in investing in arbitrage funds.

Return

In the past scenarios, the returns assured by the arbitrage funds is 7-8% over the course of 5-10 years. In case an individual wants to invest in a mix of best debt funds and best equity funds in the market, then definitely consider investing money in arbitrage funds. But you should also note that the funds do not assure regular compulsory returns.

Cost of investment

The cost charged on the arbitrage funds is high as it includes the fund manager’s fee and the fund management charged. The funds incur huge transaction cost and have a high turnover ratio as the trading of these funds is done frequently. In addition to this, the funds incur exit loads for a period of 30 to 60 days, which discourages the investors from exiting early. These costs drive up the combined cost of the funds and thus puts downward pressure on your take home funds.

A write-up on benefits of mutual funds

Investment horizon

The investors ready to invest in for a period of 3-5 years (short term mutual funds to medium term) should definitely consider investing in these funds. And due to the exit loads attached to it, the investors should keep investing in it for at least 3-6 months.

The returns depend on the existence of a highly volatile market. So, lump sum investment should be preferred over SIP. In the case of absence of a volatile market, consider investing in liquid funds over arbitrage funds.

Therefore, we advise you to take into account all the current market conditions before considering investing in arbitrage funds.

Financial goals

In case you have a short term to medium term financial goals, then we advise you to invest in arbitrage funds. Instead of depositing it with bank park your excess money in arbitrage funds and earn a high rate of interest. If you have already invested in equity funds, then we recommend you use the facilities of the Systematic transfer plan (STP) and transfer the money into arbitrage funds. Though it earns less interest, the risk is relatively lower than investments made in the equity market.

Tax on gains

The taxation criteria employed is the same as in the case of equity funds. If the trading of funds is done within a year, then it will be the short term capital gain (STCG) and taxation is at the rate of 15% per annum. And if the trading of the funds is after a year, then it will be the Long term capital gain (LTCG). The gain earned on this fund is free from tax up to Rs. 1 lakh and then the tax will be at the rate of 10% per annum (without indexation). These funds are suitable for investors who are in higher tax bracket to earn tax-efficient returns. Also, read on How are the mutual funds taxed? 

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Top 5 Arbitrage funds

L&T Arbitrage Opportunities Fund regular growth

The main aim of L&T arbitrage opportunities it to invest in arbitrage opportunities for generating reasonable returns. The investment is predominantly in arbitrage opportunities in the cash and derivatives market. There is another option of L&T infrastructure funds you should learn about.

Reliance Arbitrage Funds- growth

The primary objective of the scheme is to generate income by taking advantage of arbitrage opportunities. These opportunities potentially exist between cash and derivative market and within the derivative segment along with investments in debt securities & money market instruments.

Learn more on stock vs debt, which is better? 

Kotak Equity Arbitrage Funds Growth

Kotak equity scheme is an open-ended scheme that generates income between the spot and future market through arbitrage opportunities. Must read more on Kotak mutual funds now. These opportunities emerge out of pricing anomaly, and also in fixed income instruments through surplus cash deployment. The investment of balance money is in money market instruments and debt.

SBI Arbitrage Opportunities Fund regular growth

The main aim of the  SBI fund is to exploit profitable arbitrage opportunities between spot and derivative market segments. The workings of the funds are toward providing regular income and capital appreciation. The investment of surplus money is in debt and money market instruments. Keep reading on what are SBI mutual funds now.

UTI Arbitrage Funds-Regular Plan growth

First, understand what are UTI mutual funds. Now, the UTI arbitrage funds scheme seeks to generate capital appreciation through arbitrage opportunities between cash and derivative market. The deployment of surplus cash in debt securities and money market instruments.

We at WealthBucket believe in over-delivering while serving our clients who want to invest in Equity funds, Debt funds, Liquid fund or short term funds. You can either call us at +91 9999379929 or mail us at contact@wealthbucket.in

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