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Home » Our Products » Mutual Funds » Hybrid » Arbitrage Fund

What are Arbitrage Fund?

Arbitrage Fund is a type of equity mutual fund that capitalizes on the mispricing between the cash/spot market and derivatives/ futures market. In simple words, it refers to taking advantage of the difference in pricing in two markets at the same time.

How Does Arbitrage Fund work?

  • • This fund works on the principle of buying at a lower price in one market and selling at a higher price in another market to make profit. Say, a company’s stock is trading at Rs 500 in the cash market and at Rs 550 in the futures market.
    • So, Rs 50 per share is the profit an investor can make by buying stock in the cash market and simultaneously selling it in the futures market.
    • Exiting the funds prematurely involves a nominal penalty, usually 0.25-0.5% in the first three to six months as compared to 1% in case of bank FDs.
    • Arbitrage funds can be redeemed in three working days.

How Does Arbitrage Fund work?

  • • It is perfect for the investors with a lower risk appetite as it is the safest option in the time of volatility.
    • The arbitrage opportunities exist only when the markets are unstable and uncertain.
    • Those who want to stay invested for medium to long term.

Why Should One Invest in Arbitrage Fund?

  • • Safe option to park money when there is persistent volatility in the market.
    • Returns are likely to be much higher than investment in savings account.
    • The fund managers reduce the risk of equities by hedging against the derivatives. Arbitrage Fund and Taxation

Taxability:

Since arbitrage funds maintain an average exposure of more than 65% to equity, they are treated as equity funds, their holding period for long-term capital gain is one year.

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