Arbitrage Funds are equity-oriented hybrid funds. The fund earns a profit out of the difference in pricing of securities in two different markets. These funds perform well in a volatile market.
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Top Best Arbitrage Funds for long-term growth
Till Date CAGR
|Nippon India Arbitrage Fund (G)|
|Aditya Birla Sun Life Arbitrage Fund (G)|
|L&T Arbitrage Opportunities Fund (G)|
|Kotak Equity Arbitrage Fund (G)|
|Edelweiss Arbitrage Fund (G)|
|ICICI Prudential Equity Arbitrage Fund Institutional Plan (G)|
|HDFC Arbitrage Fund Retail (G)|
|UTI Arbitrage Fund (G)|
|Axis Arbitrage fund (G)|
|HDFC Arbitrage Fund Wholesale Plan (G)|
|ICICI Prudential Equity Arbitrage Fund (G)|
|IDFC Arbitrage Fund (G)|
|PGIM India Arbitrage Fund (G)|
|Baroda BNP Paribas Arbitrage fund (G)|
|Invesco India Arbitrage Fund (G)|
|Indiabulls Arbitrage Fund (G)|
|JM Arbitrage Fund (G)|
|SBI Arbitrage Opportunities Fund (G)|
|Sundaram Arbitrage Fund (G)|
|Tata Arbitrage Fund (G)|
Arbitrage funds take advantage of market movements and price differences in two different markets. Namely, the cash or spot market and futures market. Also, the price differences are very minute. Hence the fund manager has to be efficient in identifying such opportunities in the market. Arbitrage mutual funds in India appeal to those investors who want to benefit from volatile markets without much risk.
|Fund Name||Till Date CAGR||Expense Ratio|
|Nippon India Arbitrage Fund||6.9%||1.06|
|Tata Arbitrage Fund||4.8%||1.08%|
|Kotak Equity Arbitrage Fund||6.9%||1.01%|
|SBI Arbitrage Opportunities Fund||6.7%||0.82%|
|UTI Arbitrage Fund||6.8%||0.92%|
India arbitrage fund is a type of equity-oriented hybrid mutual fund which makes a profit out of the difference in pricing of securities in two different markets. The securities are bought at lower prices from the cash market and sold in the futures market at a higher price. The difference is the profit earned through arbitrage. Hence, arbitrage funds perform well in a volatile market.
A majority of the time, the difference in pricing in the cash market and futures market is tiny. The arbitrage fund invests in a huge number of opportunities per day to make profits. The tax for equity arbitrage funds is similar to equity mutual funds. The fund house allows investors to do a lump sum investment or a SIP investment in arbitrage funds. Additionally, one can also opt for a systematic transfer plan (STP). The minimum investment amount varies from INR 1,000-INR 5,000. And, the minimum SIP investment amount is INR 500.
The India arbitrage fund makes a profit out of the pricing difference in 2 different markets of the same security. The two markets are Stock Market and Futures Market. In other words, arbitrage funds generate returns from the price difference of the share in both the markets. If the market is expected to go up, a certain number of shares are bought in the stock market and simultaneously sold on the futures market. On the contrary, if the market is expected to fall, the arbitrage fund will short sell in the stock market and purchase the share at a lesser price in the futures market.
The cash market is commonly known as the stock or spot market. Hence, the price of a security in the stock market is called the spot price.
The futures market is an equity derivatives market, and it features only the expected future price of the securities. To trade on security for an expected future price, an investor will have to enter into a futures contract for a future date. The future date is known as the maturity date.
The transfer of securities takes place to the investor at the maturity date of the contract. On the maturity date, the transaction takes place at a price agreed while entering into the contract.
For instance, the arbitrage fund purchases 10,000 shares of ABC Company for INR 50 per share at the beginning of June. Simultaneously, it sells 10,000 shares of the July Futures contract of ABC Company for INR 65. Here two possibilities can happen at the end of July.
For the above example, both the scenarios are profitable irrespective of the market direction. However, in reality, the price difference is very less between the stock market and futures market. To achieve good returns, the fund needs to transact in higher amounts in a single day.
Arbitrage mutual funds in India take advantage of the markets to generate profits. The fund invests in both equity and debt securities. The profits are realized over a medium time horizon. The medium term investment horizon handles the volatility risk. The volatility risk usually arises due to equity exposure. The portfolio manager identifies the arbitrage opportunity and takes a position to align with the funds objective.
Additionally, some portion of the asset is invested in fixed income instruments. The fund manager ensures that these instruments are of high credit quality only. Some of these high credit quality debt instruments are zero-coupon bonds, term deposits, and debentures. During inadequate arbitrage opportunities, this strategy of investing in fixed income helps keep up with the fund returns.
Therefore, the arbitrage fund manager’s role is to identify an opportunity in the spot and futures market. Also, the fund manager of the fund house ensures that the assets are invested in fixed income securities to generate returns during low arbitrage opportunities.
Arbitrage mutual funds in India generate profits from low-risk buy and sell opportunities in the spot and futures market. Arbitrage funds can have similar risk levels as debt funds. Therefore, investors seeking low risk like debt funds, but with a little equity exposure can invest in arbitrage funds. Mostly, Crisil BSE 0.23% Liquid fund is the benchmark fund for several arbitrage funds. Arbitrage funds are the best funds to invest in volatile markets.
Arbitrage funds are best suited for investors looking for equity exposure but are not high-risk takers. The risk profile of these funds is similar to that of a debt fund. For short to medium financial goals, arbitrage funds are the right funds to invest. They are safe options in times where the market is fluctuating. Therefore, these funds benefit from fluctuations. Arbitrage funds are for investors seeking good returns from a volatile market while taking a calculated risk.
Investors can do a lump sum investment or a SIP investment in arbitrage funds. Additionally, one can also opt for a systematic transfer plan (STP). Investors can determine potential sip returns from arbitrage funds using Scripbox’s SIP Calculator.
Purchase of arbitrage funds can be done through a fund house directly, or any intermediary or from the stock exchange using a demat account.
The profit is the difference in pricing in two different markets, and this difference is tiny. Since the difference is minimal, an investor will have to invest a higher amount to make an average profit. The quantum of trades in these funds must be high.
Price of stock in the stock market- Rs 1215
Price of stock in the futures market- Rs 1215.15
Here the difference is the price is just Rs 0.15.
Hence to make a high an=mount of profit, a high amount of capital must be invested.
The risk of profit and capital is not high as the profit is based on price in two markets, which is already known to the fund manager at the time of investing in the long term.
When a transaction is made in the stock market only, the risk of market movements to equity is exposed to the investment. But when the transaction is made in stock in the stock market and futures market, the risk seems to cut down.
The fund managers can benefit from market volatility and make remarkable profits. The higher the movements in prices in both markets, the higher will be the difference in prices leading to higher profits.
The benefit of volatility is available to all the investors who will make a transaction. As more and more investors make more and more transactions, the difference between both markets will scrape away. Hence, there will be very little chance of profits.
The cost of investments in arbitrage funds is higher in comparison to other funds. An annual fee is charged on the funds’ overall asset known as the expense ratio. These costs include the fund manager’s fee, fund management fee.
Since the arbitrage fund involves multiple transactions, the total transaction cost on the fund is high. Post all these expenses, and if an investor wants to exit early, the exit load fee is also levied.
Hence, it is advisable to calculate the expenses of managing and maintaining the fund wisely before investing in arbitrage funds.
Arbitrage funds are equity mutual funds. Hence the tax treatment is similar to the tax on equity funds. The tax on equity arbitrage funds is:
|Investment Period||Amount of gain||Nature of tax||Rate of tax|
|Less than 12 months||Any amount||STCG||15%|
|More than 12 months||Less than 1 lakh||LTCG||Exempt|
|More than 12 months||More than 1 lakh||LTCG||10% of gains over 1 lakh|
To understand more about Mutual Fund basics refer to the article How Mutual Funds Work?
No, arbitrage funds are not tax efficient. To save tax, one can invest in Equity Linked Savings Scheme (ELSS) mutual funds or other instruments that qualify for Section 80C deductions. For tax savings with equity exposure, investors can choose ELSS mutual funds. However, mutual funds investment is subject to market risks. Hence investors should proceed with funds that best suit their financial goals.
A Hybrid mutual fund invests both in equity and debt. They best suit investors with a medium-term horizon. However, for a short term horizon, debt mutual funds and bond funds are a better option than fixed deposit or saving account. Also, for the long term, equity mutual funds are the best choice.
The types of Hybrid Funds are:
1.Aggressive Hybrid Funds
2.Dynamic Asset Allocation or Balanced Advantage Funds
3.Equity Savings Fund
4.Conservative Hybrid Fund
6.Multi-Asset Allocation Fund
7.Balanced Hybrid Fund