Arbitrage funds are a category of equity funds.Tax on these is also levied like equity funds.These are less affected by the fluctuations of the equity market.
New Delhi. Investors’ inclination is now moving towards mutual funds. For some time now, big investors have preferred to invest in arbitrage funds instead of liquid or overnight funds. According to Franklin Templeton’s data, there has been an inflow of Rs 1.08 lakh crore in arbitrage funds in the last one year. Due to this investment, its asset under management has doubled to Rs 2.21 lakh crore in the last twelve months. According to Value Research, arbitrage funds have given an average return of 7.48 percent in the last one year. This return cannot be considered very high. But still, the increased interest of big investors in them has drawn everyone’s attention towards them. Common investors are also curious to know what arbitrage funds are and how do they earn?
Arbitrage funds are a category of equity funds. These funds make profits by taking advantage of the difference in the price of the same stock in two different parts of the stock market, the cash market and the futures market. When the market fluctuates, the difference in prices in these two parts increases, which provides an opportunity for arbitrage funds to make profits. At least 65 percent of their investment is in equity. The rest of the investment is made in debt and money market instruments.
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How is money earned?
Arbitrage funds buy shares from one segment at a lower price and sell them at a higher price in another segment and earn profit. For example, the price of one share of a company is Rs 200 in the cash segment and Rs 205 in the future/derivative segment. The arbitrage fund manager buys 100 shares of the company for Rs 20,000 in the cash segment and sells them for Rs 20,500 in the derivative segment and earns a profit of Rs 500. Yes, you will get returns only if the price of the share remains the same in the cash and derivative segments at the time of expiry of the future contract.
What if the market reverses direction?
Even if at the time of expiry of the future contract, the share price falls to Rs 195 in the cash market and Rs 190 in the future market, the fund manager will not suffer any loss. Because in the cash market he will suffer a loss of Rs 1000, but in the future market he will have a profit of Rs 3000. That is, overall he will have a net profit of Rs 2000.
Tax on Arbitrage Funds
Arbitrage funds fall under the category of equity mutual funds, hence they are taxed like equity funds.
If redeemed in less than a year: If you withdraw your investment in less than a year, you will have to pay short-term capital gains tax which is 15%.
If redeemed after more than a year: If you withdraw your investment after one year, you will have to pay long-term capital gains tax. This tax is 10% on income above Rs 1 lakh per annum.
Why invest in arbitrage funds?
- low risk: These funds are less affected by the fluctuations in the equity market.
- Regular Income: These funds have the potential to deliver regular income.
- Better in terms of taxes: The tax rate on these is lower compared to equity funds.
- Diversity: These funds help in diversifying your portfolio.
Tags: Business news, Money Making Tips, Mutual Funds
FIRST PUBLISHED : August 24, 2024, 13:09 IST
