As capital markets are experiencing tremendous uncertainty and volatility, investors seek arbitrage opportunities to create wealth from their savings. However, with time and the generation of regulatory provisions, arbitrage opportunities have become rare and are time-consuming to identify and execute. Whether you’re starting new or looking to grow your existing investment portfolio, investing in arbitrage mutual funds can be one of the best ways to go. This blog looks at different aspects of arbitrage funds and why they are a good addition to your investment portfolio.
What is Arbitrage Fund?
Arbitrage fund is the most risk-averse and sought-after mutual fund type in India. Over the years, best arbitrage funds have delivered consistent returns even during volatile economic conditions. It refers to an investment vehicle seeking to take advantage of price discrepancies in the marketplace.
An arbitrage fund might purchase shares of a company about to be acquired at a lower price than the acquisition price and then sell those shares after the acquisition is complete for a profit. For example, if a stock is trading at INR 50 per share on one exchange and INR 51 per share on another exchange, the arbitrage fund will buy the stock on the first exchange and sell it on the second exchange, pocketing the INR 1 per share difference.
Best arbitrage funds can be used to profit from various types of transactions, including mergers and acquisitions, spin-offs, and even initial public offerings (IPOs). In each case, the arbitrage fund seeks to purchase assets at a lower price and then sell them at a higher price, thus generating a return for investors.
While arbitrage funds can be an attractive investment option for many reasons, some risks are also considered. For instance, arbitrage funds typically involve a high degree of leverage, magnifying losses if the market moves against the fund. Additionally, arbitrage opportunities can be difficult to find and may require much research and analysis.
Overall, arbitrage funds can be a great way to earn a return in the market, but it is important to understand the risks involved before investing.
How do Arbitrage Mutual Funds Work?
Fixed-income arbitrage is a type of trading that involves taking advantage of price discrepancies between different markets. For example, a trader might buy a bond in one market and then sell it in another market where the price is higher. The goal is to profit from the price difference or the “arbitrage.”
There are a few things to keep in mind when it comes to fixed income arbitrage:
- It’s important to have a good understanding of both the bond market and the stock market.
- You need to be able to quickly identify opportunities and act on them.
- You need to have a firm understanding of risk management.
- You need to be comfortable with holding positions for long periods of time.
- You need to have a good understanding of the tax implications of fixed-income arbitrage.
Key Takeaways
- An arbitrage fund is a great way to boost returns and minimise risk. However, it is important to remember that these funds are subject to market conditions and can lose money in a down market.
- Arbitrage fund seeks to profit from price discrepancies in the market.
- Arbitrage funds can be a good way to diversify a portfolio, so investors should consider allocating a small portion of their assets to these types of funds.
- Best arbitrage funds can be used to hedge against market volatility.
- Arbitrage funds can be used to profit from both rising and falling markets.
- Arbitrage funds may be subject to market, liquidity, and other risks.
Who Should Invest in Arbitrage Funds?
Arbitrage fund refers to mutual funds that invest in a mix of equity and debt instruments to exploit the price differentials between the two asset classes. Arbitrage fund investment is suitable for investors looking for a relatively low-risk investment option with the potential for modest returns. These funds typically have lower volatility than equity-only funds, making them good for risk-averse investors.
What to know before investing in Arbitrage funds?
Arbitrage funds leverage the price disparity between securities across a variety of markets to generate healthy returns. The stock, cash, and futures market are the primary transaction points for arbitrage funds. The difference in the pricing of securities in the futures and stock market is how arbitrage funds earn the returns.
Being one of the hottest investment trends, one should be aware of the risks and rewards that concern them together with keeping different factors that concern in mind:
- Monetary objectives
There are a few key things to consider when investing in an arbitrage fund, and one of the most important is your monetary objectives. What are you looking to gain from investing in these types of funds? Are you simply hoping to grow your money over time, or are you looking for more immediate returns?
Of course, there is no guarantee that you will make any money from investing in arbitrage funds, but understanding your own financial goals can help you make better decisions about allocating your resources. If you are risk-averse, you may want to invest less in arbitrage funds than in other types of investments.
- Involved extra costs
Arbitrage funds come with extra costs that must be considered before investing. These include the management fee, performance fee, and other associated costs. The management fee is a charge assessed by the fund manager for running the arbitrage fund. The performance fee is a charge assessed by the fund manager based on the fund’s performance. Other associated costs include things like transaction costs and taxes.
- Past performance is a matrix
When looking to invest in arbitrage funds, you should keep a few things in mind. First and foremost, you need to ensure that the fund you are considering has a working system. This means that the fund should have a clear and concise strategy for how it plans to generate profits through arbitrage. Without a well-defined system, it will be very difficult for the fund to generate consistent profits.
Secondly, you need to look closely at the fund’s track record. How well has it performed in the past? Are there any red flags that you should be aware of? If the fund has a history of poor performance, it is probably not worth investing in.
Did you Know?
More than 65% exposure of arbitrage funds is towards equities.
Also Read: What are ELSS Funds?
How to Invest in Arbitrage Funds?
In order to produce arbitrage returns, arbitrage funds use hybrid mutual fund strategies that take advantage of pricing discrepancies between the same underlying assets in several capital market segments. Also available for investment are debt and money market products.
There are a plethora of technology companies that allow investors to leverage the digital medium and invest in the top arbitrage funds. The process is smooth and paperless and can be done online. One has to simply log in or register on the online portal, opt for an appropriate plan, input all the required details, and start investing.
Word to Remember
IPOs can be a risky investment, but they can be a lucrative way to generate returns for arbitrage funds. For investors looking to get in on the ground floor of a promising company, an IPO can be a great opportunity. But it’s important to remember that there is always a risk of loss when investing in any company, no matter how big or small.
How are Arbitrage Funds Taxed in India?
During taxation, arbitrage funds are treated as equity funds. People holding these funds for less than a year pay 15% capital gains tax, whereas, if they sell arbitrage funds after a year, they pay only 10% long term capital gains tax. If the investors keep their funds for longer than a year then this the returns on investment will be considered as long term capital gains (LTCG). Arbitrage fund refers to a mutual fund seeking to profit from price differences in different markets. The benefits of investing in arbitrage funds include taxing similarly to equity funds – you can potentially enjoy the same capital gains tax benefits with an equity mutual fund. Additionally, arbitrage funds can provide a higher return potential than traditional mutual funds, making them attractive for investors seeking to maximise their returns.
Top 7 Arbitrage Funds in India
Here is the list of the Top 7 arbitrage funds in India 2022-2023:
| Fund Name | Net Assest Value (in rupees) | Net Assets |
| Kotak Equity Arbitrage Fund | 30.5941 | 25,789 Cr |
| Edelweiss Arbitrage Fund | 15.9006 | 6,993 Cr |
| Nippon India Arbitrage Fund | 321.8777 | 10,809 Cr |
| ICICI Prudential Equity Arbitrage Fund | 28.1393 | 13,400 Cr |
| Invesco India Arbitrage Fund | 26.0743 | 1,095 Cr |
| Axis Arbitrage Fund | 15.407 | 5,303 Cr |
| SBI Arbitrage Opportunities Fund | 27.6271 | 8,372 Cr |
Conclusion
If you’re looking to diversify your investment portfolio and aren’t sure how to go about it, you need to invest in arbitrage mutual funds. These funds allow you to diversify your portfolio and reap the benefits of the arbitrage strategy. We hope this blog has answered your questions and can help you make more money for your portfolio.
Also Read: What are Liquid Funds?
FAQs
Though arbitrage funds are generally considered a less risky investment tool, they too can be exposed to some amount of risk. Hence, it is also an unpredictable market with reduced loss chances.
Short-term capital gains refer to the return extracted when you sell your arbitrage fund within one year of purchase. Also, the returns are subjected to a tax deduction of 15% alongside cess in this case.
When it comes to choosing an arbitrage fund for investment, there are a few key factors to consider:
First, you’ll want to look at the fund’s performance over time.
Next, you’ll want to look at the fees charged by the fund.
Finally, you’ll want to consider the fund’s investment strategy.
Liquid funds can be cashed within 4 hours. At the same time, arbitrage funds require 3 to 5 days.
Yes, due to the spread differential, an arbitrage fund can undergo negative returns for a short span.
Arbitrage funds are a lucrative investment as it helps investors to profit from volatility in the market without taking a lot of risk.
The taxes on arbitrage funds are similar to equity funds. Investors holding arbitrage funds for less than one year will pay 15% capital gains tax. Investors selling the funds after a year will pay a 10% tax on long-term capital gains.
Arbitrage funds is a productive option for investors looking forward to make the most in volatile markets. Fixed deposits on the other hand provide investors with higher rates of interest till the maturity date.
Yes, arbitrage trading is a legal practice in India. It is encouraged in a variety of markets as it showcases price discrepancies.
Some of the downsides of investing in arbitrage funds are:
– Arbitrage funds are not the most reliable funds out there and do not present profitability in stable markets.
– The expense ratios of arbitrage funds are very high.
Fixed deposits are riskier in comparison to fixed deposits. With arbitrage funds, Returns are good but they are not always fixed and with fixed deposits these returns are fixed.
Also read about Equity Mutual Fund on Investment Simplified.
