Arbitrage Funds(Updated with LTCG Tax)
Arbitrage is the simultaneous buying & selling of an asset in different markets to benifit from the price difference.
A Stock can get traded on BSE & NSE : Cash Markets and Derivates Market (Futures).
for ex: Stock ‘A’ : Rs 100 -> BSE and Rs 102 -> Derivaties. So Arbitrage Fund Manager can make 2 Rs Arbitrage Profit in the tradeoff.
Do not invest into the fundamentals of the stock.
Free from risk of equity investing.
Are hybrid funds, investing a min of 65 % assets in equity & equity related instruments.
‘Type Scheme’ -> An open ended scheme investing in arbitrage opportunities.
Taxed as Equity
Performs best in a volatile market.
Returns like Liquid Funds. LF : 6.73 % pa, AF: 6.15 % pa.
Taxed like Equity.
Short Term(less than a year) : 15 %
Long Term(more than a year): 10%
Good for short term investment(less than 1 year)
Short Term Liquid Fund Taxation
5% – Liquid Fund <3 years – as per slab
20% – Both look same. >3 years – 20% after indexation
30% – Arbitrage Funds
Therefore, Arbitrage Funds are not a long term wealth creation tool (should be used < 1 year duration).
Returns -> risk free, -> depends on arbitrage opportunities.