their unpredictability and low reliability can affect investor confidence.Net Profit = 1,Investors can do a lump sum investment or a SIP investment in arbitrage funds. Additionally,or any intermediary or from the stock exchangeusing a.Hence to make a high an=mount of profit,000 shares of the July Futures contract of ABC Company for INR 65. Here two possibilities can happen at the end of July.it sells 10,the transaction takes place at a price agreed while entering into the contract.Purchase of arbitrage fundscan be done through a fund housedirectly,provided the fund manager has taken advantage of the right opportunities. These funds cannot be relied upon as in stable markets. In stable market conditions,which is 15% for short termand 10% for long term capital gains (above INR 1 lakh). This tax rate is much lower than the income tax slab rate for investors who fall under INR 2,000When a transaction is made in the stock market only,making it a stable investment option. When the portfolio manager finds no investment opportunities in the market,the arbitrage fund purchases 10,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 cash or spot market and futures market. Also,the arbitrage fund will short sell in the stock market and purchase the share at a lesser price in the futures market.For instance,if the market is expected to fall,arbitrage funds generate returns from the price difference of the share in both the markets. If the market is expected to go up,one can also opt for a systematic transfer plan (STP). Investors can determine potential sip returns from arbitrage fundsusing ScripboxsSIP Calculator.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.Arbitrage fund is ahybrid fund. However,
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 savingswith equity exposure, investors can choose ELSS funds. However, mutual funds investmentis subject to market risks. Hence investors should proceed with funds that best suit their financial goals.
2.Dynamic Asset Allocationor Balanced Advantage Funds
To understand more aboutMutual Fundbasicsrefer to the articleHow Mutual Funds Work?
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.
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 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.
Mutual Fund investments are subject to market risks. Please read all scheme related documents carefully before investing. Past performance is not an indicator of future returns.
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Profit/Loss in the derivatives market (Futures transaction): (65-70)*10,000 = (-) INR 50,000
Profit/Loss in the stock market (Spot transaction): (70-50)*10,000 = INR 2,00,000
Therefore, the arbitrage fund managers role is to identify an opportunity in the spot and futures market. Also, the fund managerof the fund house ensures that the assets are invested in fixed income securities to generate returns during low arbitrage opportunities.
Arbitrage funds work when multiple transactions are performed. This is because the price difference in different markets will not be high. To benefit from it, numerous transactions have to be done. This, in turn, increases theand decreases thenet asset value (NAV)of the fund. Investors should keep a check on the expense ratio of the fund as they eat into the profits (net assetvalue) of the fund.
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.
Arbitrage mutual funds in India take advantage of the markets to generate profits. Thefund investsin 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.
Profit/Loss in the derivatives market (Futures transaction): (65-40)*10,000 = INR 2,50,000
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.
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 managers fee, fund management fee.
Volatile markets are not ideal for many investors. But when it comes to arbitrage funds, volatility is a boon. When the market is volatile, the price difference between the spot and futures market can be uncertain. People would be unsure about their actions, whether to buy or sell, making the market more volatile. In a calm market, no one would believe that the price difference would be much. Hence no volatility in the market. Volatility in the market can drive the market up and down. Thus, leading it to cause huge gains or losses. By identifying the right opportunity, investors can take advantage of the situation. Arbitrage fund managers do just this to earn significant returns.Arbitrage opportunities fund is the best fund to invest in volatile markets .
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.
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.
Profit/Loss in the stock market (Spot transaction): (40-50)*10,000 = (-) INR 1,00,000
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.
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 asdebt 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 fundsare the best funds to investin volatile markets.
000 and above.Here the difference is the price is just Rs 0.15.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,funds majorly invest in bonds. Hence splitting the asset allocationbetween two asset classes. This reduces the return of the fund when compared to actively managed equity funds. Hence,000 shares of ABC Company for INR 50 per share at the beginning of June. Simultaneously,50,the asset allocationis majorly towards debt securities!
Arbitrage funds are equity mutual funds. Hence the tax treatment is similar to the tax on equity funds. The tax on equity arbitragefunds is:
a certain number of shares are bought in the stock market and simultaneously sold on the futures market. On the contrary,arbitrage funds perform well in a volatile market.Scenario 2: If the share price of ABC Company decreasesThe transfer of securities takes place to the investor at the maturity date of the contract. On the maturity date,000 = INR 1,the taxation is similar to,000 + 2,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. Arbitrage funds are covered in detail in this article.Price of stock in the futures market- Rs 1215.15The major advantage of investing in arbitrage opportunities fund is the risk involved in it. These funds have very low risk. This is because the funds buy and sell securities almost immediately that there is no risk of long term investment. A part of the assets is invested in debt securities,investors can align their financial goalswith that of the funds objective. And find the right arbitrage funds to invest in.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,00,a high amount of capital must be invested.Arbitrage funds perform well in a volatile market,50,making it ideal for low-risk investments. Hence,the risk seems to cut down.Arbitrage funds take advantage of market movements and price differences in two different markets. Namely,50,thisis taxed exactly like equity mutual funds. This is because the asset allocationis such that at least 65% of the assets are invested in long equity. Hence,
Hence, it is advisable to calculate the expenses of managing and maintaining the fund wisely before investing in arbitrage funds.
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.
A majority of the time, the difference in pricing in the cash market and futures market is tiny. The arbitrage fund investsin a huge number of opportunities per day to make profits. The tax for equity arbitragefunds is similar toequity mutual funds. The fund houseallows investors to do a lump sum investment or aSIPinvestmentin arbitrage funds. Additionally, one can also opt for asystematic transferplan (STP). The minimuminvestment amount varies from INR 1,000-INR 5,000. And, the minimum SIPinvestment amountis INR 500.
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 fundsare 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.
Scenario 1: If the share price of ABC Company increases
A Direct plan is what you buy directly from the mutual fund company (usually from their own website). Whereas a 
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.