Banking on Volatility in Market: Arbitrage Funds

The volatility in the equity market can be suitably tapped through investment in arbitrage funds schemes.

A type of mutual fund, arbitrage funds aim for the price difference between the cash and futures market. In the expectation of a rise in the equity market, the fund managers purchase stocks in the cash market and subsequently sell them in the futures market.

In case the market sentiments show a dip, the underlying asset will be sold in the cash market at a price on the higher side and purchased in the futures market at a lower price. That’s how the profit is generated in the case of arbitrage funds.

Generally, about 70-80% of the portfolio of arbitrage funds is invested in equity, cash and futures, while about 20-30% is parked in short-term debt instruments.

Arbitrage funds are known to offer tax advantages. Similar to the lines of equity funds, arbitrage funds are taxed, too They qualify for long-term capital gains (LTCGs) tax of 10% in case the investments are held for a timeframe exceeding a year. In case the investments are made for less than a year, a short-term capital gains (STCGs) tax of 15% is applicable.

However, arbitrage funds are not completely risk-free. There is some amount of risk involved in their investments. Arbitrage funds depend on the mispricing occurring in the markets. This gives an investor a comparatively safer option than a few of the other short-term funds as these funds offer better returns during the phase of market volatility.

You May Also Like

Save Your Tax By Claiming Medical Expenditure Under Section 80D

The current financial year is near to end on 31st March. You…

Senior Citizens: PMVVY or SCSS investment scheme, which one is best?

Due to a fall in the interest rates offered on fixed deposits…

EPFO lowers the interest rate on PF deposits to 8.5% for FY 2019-20

The Employees’ Provident Fund Organisation (EPFO) has notified the interest rate for…