Arbitrage funds create positions in the equity spot and futures markets to exploit arbitrage opportunities that arise due to mis-pricing in these markets. Fund Manager buys a stock in the lower-priced spot market and sell it in the higher-priced futures market. The difference in the prices between the two markets is the fund’s return, irrespective of subsequent price movements.
Negligible Risk: As they bank on the mispricing happening in the markets, this gives the investor a safer option compared to other short-term funds since these funds offer better returns during market volatility.
Returns: These funds generally give a return of about 5-7% of the amount invested. This is higher compared to Liquid Funds or short-term debt funds in low rate environment (When RBI is reducing rate).
Favourable Taxation: One of the biggest benefits of investing in these funds is the tax treatment. Equity Funds attract long term capital gains. If the gains are made up to INR 1 lakh then it counts under tax-free. Tax at 10% applies to gains above INR 1 lakh.
Thus, making arbitrage funds a lucrative investment option.