What is Arbitrage Fund, in which big people are constantly investing money?

New Delhi. Investors are now leaning towards mutual funds. For some time now, large investors have preferred to invest in arbitrage funds rather than liquid or overnight funds. According to data from Franklin Templeton, the inflow of arbitrage funds in the last one year was Rs 1.08 lakh crore. With this investment, its assets under management have doubled to Rs 2.21 lakh crore in the last twelve months. According to Value Research, the average return of mutual funds in the last one year has been 7.48%. This return cannot be overestimated. But still the growing interest of big investors in them has drawn everyone’s attention to them. Common investors are also curious to know what are arbitrage funds and how do they earn?

Arbitrage funds are a category of equity funds. These funds earn profit by taking advantage of the difference in the price of the same share in two different segments of the stock market, cash market and futures market. When the market fluctuates, the price difference between these two segments widens, giving arbitrage funds an opportunity to make a profit. At least 65% of their investment is in equity. The remaining investments are made in debt and money market instruments.

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How are the earnings?
Arbitrage funds buy shares from one segment at a lower price and sell them at a higher price in another segment and make money. For example, the share price of a company is Rs 200 in the cash segment and Rs 205 in the futures/derivatives segment. An arbitrage fund manager buys 100 shares of a company for Rs 20,000 in the cash segment and sells them for Rs 20,500 in the derivative segment and makes a profit of Rs 500. Yes, returns will be available only if the share price remains the same in the cash and derivative segments at the time of expiry of the futures contract.

What if the market turns in the opposite direction?
Even if the share price falls to Rs 195 in the cash market and Rs 190 in the futures market on expiry of the futures contract, the fund manager will not incur any loss. Because in the cash market he will lose Rs 1000, but in the future market he will make a profit of Rs 3000. This means that overall he will get a net profit of Rs.2000.

Tax on arbitrage funds
Arbitrage funds fall under the category of equity mutual funds, so they are taxed like equity funds.

If redeemed in less than one year: If you withdraw your investment in less than one year, you will have to pay short-term capital gains tax which is 15%.

On redemption after more than one year: If you withdraw your investment after one year, you will have to pay long-term capital gains tax. This tax is 10% on annual income above one lakh rupees.

Why Invest in Arbitrage Funds?

• Low risk: These funds are less affected by equity market fluctuations.
• Regular Income: These funds have the potential to give regular income.
• Tax-advantaged: The tax rate on them is lower as compared to equity funds.
• Diversity: These funds help diversify your portfolio.

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