Arbitrage funds use the price difference in the cash and derivatives segment to generate returns. They arent for the NSE and BSE cash segment arbitrage.
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Arbitrage funds are a particular type of mutual fund that takes advantage of the difference in price in the cash and futures or derivatives segment price to generate returns.
It is different from theNSE and BSE arbitrageone may assume from the cash segment buy and sell for a differential price.
Here is the performance of the top arbitrage funds as per theValueResearchOnline.
Considering those funds that have to remain as best performing in the past 1, 3, and 5 years range, we have the following table.
The returns from each of the funds are around 6%.
Arbitrage funds are for the safe heaven investors who dont want to be taking any risk. It is a more reliable way to invest, but it also means the returns from the funds are low themain reason why I dont consider investing in arbitrage funds.
Moreover, I like to be investing in more high growth mid-caps than to invest in safe heavens large-cap as well. It is how I prefer investing, and you have to findyour process of investingthat works well for your mindset with investing.
As these funds invest predominantly in equities, their tax treatment is at par with equity funds.
So holding them for more than a year means the returns classifies aslong-term capital gains or LTCG.
Still, the funds are hybrid. Typically it means they can also invest in debt markets.
So it is better to take the tax calculation from a fund to fund basis instead of making a general viewpoint.
Investing in equity or for that matter, even in debt market investment does involve some amount of risk. So, the investment in the arbitrage funds is not risk-free, but the risk involved is very low when compared to other equity funds.
As the risk is very low, the returns arent great either.
As we have seen, the best fund returns have been as low as 6.73% annualized returns in the 5-year timeframe.
Kotak bank offers asavings bank accountwith 6% returns. So returns from arbitrage funds are not something to relook at.
Filed Under:Financial GlossaryTagged With:ArbitrageArbitrage FundsArbitrage TradingBest Arbitrage FundsBest Mutual Funds
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