Arbitrage mutual funds seek to take the benefit of arbitrage opportunities to deliver capital appreciation at a little or no risk. The fund manager of arbitrage funds takes advantage of the price difference of an instrument to gain decent capital gains. These funds offer low risk and generate average returns hence they are suitable for conservative investors who seek capital appreciation in short-term at low risk.
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Arbitrage Fundssounds to be some sort of very complicated type of mutual fund. But, the reality is something different. It is actually very easy toArbitrage Fundsunderstand and invest. The basic idea behind the launch of Arbitrage mutual funds, was to introduce such an equity fund which will earn the profits from the different prices of the same commodity. The Arbitrage and Arbitrage Plus mutual funds buy in the shares in cash from the equity market and sell them in the future market. Both the processes work simultaneously. Implying that as and when the equity shares are bought frm the share market under Arbitrage Funds at the same time they are sold to in the future market. The difference between Arbitrage mutual funds is that in Arbitrage MF all shares bought from the capital market is resold in the futures market. But, inArbitrage Plus Mutual Fundall the equity shares are not sold in the futures market. Apart from this difference there is no other difference in both the funds.
Let us understand the meaning of Arbitrage and Arbitrage Plus mutual funds with the help of a simple example. Suppose, the AMC (Asset Management Company) providing Arbitrage and Arbitrage Plus mutual funds intends to invest in the equity shares of ABC Ltd. The per share price of the company in the equity market is Rs. 500 and that in the future market is Rs. 520. The fund managers of Arbitrage and Arbitrage Plus mutual funds for the AMC will buy the shares of ABC Ltd. and simultaneously sell them in the futures market. The reason of preferringArbitrage and Arbitrage Plus mutual fundsover debt funds and equity funds is that you get the benefit of both the schemes in one single fund.
Arbitrage and Arbitrage Plus mutual funds share negligible risk as the equities are bought and sold simultaneously. Only Arbitrage mutual fund keeps some equities unsold and share a little risk but that too, very low. On the other hand, the Arbitrage and Arbitrage Plus mutual funds deal in equity shares so the returns are not fixed. They fluctuate with the bullish or bearish market conditions. Thus, they provide the scope for returns which are not stagnant.
The Arbitrage Funds have many advantages over debt funds and equity-based funds. They are as follows:
As the equities are bought in the capital market and sold in the futures market simultaneously under Arbitrage and Arbitrage Plus mutual funds, the risk factor is almost reduced to zero. There is a little risk in the Arbitrage Plus Mutual Fund, as it keeps some equity shares that are not sold in the futures market. Thus, Arbitrage and Arbitrage Plus mutual funds give capital-appreciation and at the same time saves the clients from the market fluctuations.
Arbitrage and Arbitrage Plus mutual funds provide greater tax-benefit because you can keep them for one year and have to pay the same tax as you would have paid for the equity-oriented funds. Thus, enjoying the benefits of security and capital-appreciation at the same time you have tax-efficient scheme in your portfolio.
Arbitrage and Arbitrage Plus mutual funds have a high rate of return that lies between 7-8% as compared to debt funds (4-5%). Thus, providing a risk-free investing option in the equities and also giving fairly good returns, Arbitrage and Arbitrage Plus mutual funds online are on the priority list of investors.
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