Table of Contents
What are arbitrage funds?
: Arbitrage fund is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the volatility of the asset. These funds are hybrid in nature as they have the provision of investing a sizeable portion of the portfolio in debt markets.
Are arbitrage funds better than liquid funds?
Liquid funds are much safer in comparison to arbitrage funds, as it invests mainly in debt-related instruments. While arbitrage funds are riskier as the investment returns are dependent on the market volatility. The fund managers get ample arbitrage opportunities during a bullish market.
Are arbitrage funds risky?
Arbitrage funds are a safe option for risk-averse individuals to safely park their surplus funds when there is a persistent fluctuation in the market.
Is it good to invest in arbitrage funds?
These schemes also have tax advantages. Arbitrage funds are taxed like equity schemes. They qualify for long term capital gains tax of 10% if investments are held for more than a year. If investments are made for less than a year, a short term capital gains tax of 15% will be applicable.
Is arbitrage fund a debt fund?
Although they invest primarily in equities, arbitrage funds are technically balanced or hybrid funds because they invest in both debt and equity. Therefore, they are taxed as equity funds since long equity represents an average of at least 65% of the portfolio.
Is arbitrage funds a debt fund?
Debt funds carry credit risk, which is eliminated in arbitrage funds. Arbitrage funds are treated as equity funds for taxation. Investors holding these schemes for less than a year pay 15% capital gains tax, while if they sell after a year, they pay only 10% long-term capital gains tax.
Why are arbitrage funds low risk?
Arbitrage funds generally come with a low level of risk to the investor. Because each security is bought and sold simultaneously, there is virtually none of the risk involved with longer-term investments.
Can arbitrage fund give negative return?
Arbitrage funds have an exit load of 1-6 months. Remember, widening of the spread differential can lead to arbit-rage funds delivering negative returns for very short periods.
Why arbitrage funds are better than debt funds?
Thus, a better alternative to debt funds is ‘Arbitrage Funds’. Arbitrage Funds are categorised as equity oriented schemes, hence, gains on units held for over a year are tax-free. Tax on Short Term Capital Gains on units held for less than a year is 15%, excluding surcharge and cess.
What are the different types of arbitrage funds?
Arbitrage funds may also profit from trading stocks on different exchanges. For example, they might purchase a stock at $57 on the New York Stock Exchange and then immediately sell it at $57.15 on the London Stock Exchange. Index arbitrage is another popular type of arbitrage.
What is the difference between arbitrage funds and fixed deposits?
An arbitrage fund offers high interest rates. But it is risky during volatile markets and there is no guarantee of returns. A fixed deposit provides investors with higher interest returns until the maturity date. However, you may have to pay a penalty for early withdrawals depending on the depositing entity.
What is the duration of an arbitrage fund?
It can range from short-term tenures such as 7 days to long tenure ranging up to 10 years. The interest rates for each duration will vary for different institutions. We can compare Arbitrage Fund vs FD based on the following factors: