Arbitrage Funds are hybrid mutual fund strategies that take advantage of pricing discrepancies of the same underlying assets across several capital market sectors to generate arbitrage profits. Arbitrage Funds are a promising new investment opportunity, offering investors high returns with minimal risk.
In this article, we will look at what are arbitrage funds, their advantages, and how they work.
Arbitrage funds are special investment accounts used by online traders to make quick, large trades. They are designed to help traders make money by taking advantage of small price differences between exchanges. Because of this ability to make large profits in a short amount of time, many traders use arbitrage funds to supplement their primary trading income.
The high returns that an arbitrage fund can generate make them popular among investors. However, they are also considered high-risk investments, as a single bad trade can result in a huge loss for an investor.
An arbitrage fund is a financial instrument that attempts to profit from small differences in price between two different markets. For example, an arbitrage fund might invest in a stock that is trading at a relatively cheap price in one market, and sell that stock in a market where the stock is trading at a relatively high price. Simply put, the arbitrage fund makes money when the price of the stock in the market where it is trading at a relatively high price goes down. It makes money when the price of the stock in the market where it is trading at a relatively cheap price goes up.
Arbitrage funds are ideal for individuals who want to gain equity exposure but are concerned about the risks involved. They are also a great option for active traders without time to manage the full intricacies of the markets. Arbitrage funds often charge high fees and expenses, so it is important to research whether all funds charge the same fees. Investors should also consider whether the fund charges a sales load, ie the commission paid to the advisor, or whether the fund is backed by a government, insurance company, or some other public institution.
Arbitrage funds are a great option for investors who want to make money in a short period. Let us have a look at the advantages of Arbitrage funds:
1. Stable Performance: Arbitrage funds also invest a share of their capital in debt instruments, which are often seen as relatively stable. This is a significant advantage over other asset classes, which can be highly volatile even during favorable market conditions. The fact that arbitrage funds are not as volatile as other assets are one of the reasons that they have been able to outperform the stock market over the past few decades.
2. Flexibility: Arbitrage funds allow investors to move in and out of their positions quickly, which is particularly useful during market downturns. They also allow investors to take profits in a matter of minutes and convert them into long-term capital gains by purchasing securities at a discount and then selling them at a higher price. This is in contrast to other investment vehicles, which must wait several months for a return on their investment.
3. Low Cost: Arbitrage funds usually charge reasonable fees, making them a great option for investors with a specific investment strategy or who are new to the asset class. Most arbitration schemes charge no fees, or only a nominal fee, for the initial investment, which can be made in a single transaction. This is especially true for income investors as the fees are usually very low.
These are just a few of the many advantages of investing in arbitrage funds. Arbitrage Funds have a prospective future for trading, providing investors with high returns and low risk.
Equity taxation is a significant benefit of Arbitrage funds. Returns from debt funds owned for less than 36 months are taxed according to the investor’s income tax rate, whereas profits from arbitrage funds held for less than 12 months are taxed at 15% plus any relevant charges. Profits of up to Rs 1 lakh on the sale of arbitrage fund units after 12 months from the date of purchase are tax-free for the financial year. Long-term capital gains over Rs 1 lakh are only subject to a 10% tax. The funds are taxed only once. This reduces the complexity of tax filings and provides greater certainty to investors.
Assume that the cash market price of a business ABC’s equity share is Rs 1,500 and the future market price is Rs 1,520. The fund manager purchases shares in cash at Rs 1,500 and arranges a futures contract to sell the shares at Rs 1,520. When the prices coincide at the end of the month, the fund manager would sell the shares in the future market, earning a risk-free profit of Rs 20 per share.
If the fund manager believes the price will decline in the future, he enters a long contract in the futures market which means he will buy assets with the hope that the price will rise in the future. He intends to sell the shares short in the cash market at Rs 1,520, which basically means he will sell assets with the hope that the price will fall in the future. He covers his position in the futures market at Rs 1,500 at expiry, earning a profit of Rs 20.
In conclusion, Arbitrage funds place significant orders and profit from price differences for the same security in various markets. Arbitrage funds are the solution for low-risk taking investors. Due to the reduced risk involved, investors might benefit from market volatility.
Arbitrage funds are suitable for investors who are looking for low-risk profiles for their investments. Although it is always advisable to talk to a financial advisor before investing.
When there is sustained volatility in the market, arbitrage funds are a safe choice for risk-averse investors to deposit their extra cash.
Arbitrage is defined as the act of purchasing a security in one market and selling it at a higher price in another market, allowing investors to benefit from the transitory difference in cost per share.
Yes, Arbitrage funds have a lock-in period. This means that if you invest in them, your money is locked in for a predetermined period- typically one to three years.
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