You can switch off notifications anytime using browser settings.

Sensex tanks 650 pts, Nifty nears 10,800; 5 factors that weighed on D-Street

Agri Commodities: Cottonseed oil cake, guar seed futures dip on low demand

This global asset manager is bullish on insurance, hospitals & real estate in India

European shares lower as Germanys Zalando slumps; oil stocks ease

Tokyo shares end at 4-1/2-month high, energy sector up

Base Metals: Copper, zinc, nickel futures fall on subdued global cues

Crude oil futures decline on weak global trend

Precious Metals: Gold futures up on firm domestic cues, silver falls on muted demand

Why you need a good mentor to tread the lonely road of trading

What are arbitrage funds? Should you invest in them?

Stock Analysis, IPO, Mutual Funds, Bonds & More

What are arbitrage funds? Should you invest in them?

Investor interest in arbitrage funds has increased over the last three years after the long-term holding period for debt funds was increased from one to three years.

The fund simultaneously buy shares in the cash segment and sell futures in the derivatives segment of the same company as long as the futures are trading at a reasonable premium.

Post demonetisation, a lot of investors are moving from physical savings to financial savings. For those who wish to invest inmutual fundsand have a low risk appetite, financial planners recommend arbitrage funds.

A:Arbitrage fundleverages the price differential in the cash andderivativesmarket to generate returns. The fund simultaneously buy shares in the cash segment and sell futures in the derivatives segment of the same company as long as the futures are trading at a reasonable premium. At month end on expiry, the cash and futures price coincide thus generating returns. These funds do not take a naked exposure to equities as each buy transaction in the cash market has a corresponding sell transaction in the futures market. Such funds make money from low-risk buy-and-sell opportunities available in the cash and futures market and their risk profile is similar to that of a debt fund. In fact, many arbitrage funds useCrisilLiquid Fund Index as their benchmark.

Q: Why is there higher investor interest in arbitrage funds?

A: Investor interest in arbitrage funds has increased over the last three years after the long-term holding period fordebt fundswas increased from one to three years. 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. Long-term capital gain from equity is tax-free and thedividendincome from equity does not attract dividend distribution tax. This is driving investors to arbitrage funds.

A: Arbitrage funds are safe, and carry very low risk. The fund manager creates a market neutral position by buying in cash market and selling in futures. Market volatility doesnt entail more risk for the investor in such funds. In fact, arbitrage opportunities exist only when the markets are unstable and uncertain.

Returns from arbitrage funds depend on arbitrage opportunities available between the spot market and the futures market. Such opportunities are high in bull markets. As the assets under management in this segment increase, all this money will be chasing similar arbitrage opportunities and hence returns could be lower. Over the last one year, this category of funds have given an average return of 6.91%.

(%)Mirae Asset Tax Saver Direct-G0.89-3.64-0.290.8014.36Invest NowMirae Asset Tax Saver Reg-G0.74-4.03-1.18-0.8812.79Invest NowAxis Long Term Equity Direct-G0.20-2.472.17-1.0911.04Invest NowFeatured

– Returns less then 1 year are absolute and above 1 year are annualised.

– Returns of 1 year are absolute and above 1 year are annualised..

Wealth managers advise HNIs to go for Arbitrage funds to tide over volatility

Commenting feature is disabled in your country/region.

DownloadThe Economic Times News Appfor Quarterly Results,Latest News in ITR,Business, Share Market,Live Sensex News& More.

Wealth managers advise HNIs to go for Arbitrage funds to tide over volatility

Arbitrage Funds: Low on risk, high on tax efficiency

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights:Times Syndication Service

What are arbitrage funds? Should you invest in them?

European shares lower as Germanys Zalando slumps; oil stocks ease

Tokyo shares end at 4-1/2-month high, energy sector up

Why you need a good mentor to tread the lonely road of trading

Australia shares end firmer as RBA leaves door open for more rate cuts; NZ up

Share market update: Nifty Financial Services index down; PFC slumps 4%

Share market update: Media shares trade lower; Dish TV falls 4%

GST Council meet: Relief for cars, hotels likely; sin goods may be at receiving end

Share market update: BSE Capital Goods index dips; HEG slips 5%

Share market update: Consumer Durables shares mixed; Blue Star gains 2%

Choose your reason below and click on the Report button. This will alert our moderators to take action