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.