What are Arbitrage funds?
Arbitrage funds are type of mutual funds that leverage on the price
differential in the cash and derivatives segments of the equity market to
generate returns. These funds capitalize on market inefficiencies and generate
profits for investors. These funds are hybrid in nature as they have the
provision of investing a sizable portion of the portfolio in debt markets. Arbitrage
funds do not take any directional bet on equities and just lock in the spread
available between cash & futures market
Low Risk
Arbitrage funds do not take any directional bet on equities and just
lock in the spread available between cash & futures market. Hence, they can
be a good investment option for conservative investors. Investors with an
investment horizon of 6 to 12 months and looking for low risk wealth creation
option can consider investing in arbitrage funds.
Advantage in Tax
benefits
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Arbitrage funds are classified as equity funds as they invest into
equity shares and equity derivative instruments. Since these are classified
as equity funds for taxation, dividends declared by the funds are tax free.
No capital gains tax is applicable if redeemed after a holding period of 12
month. Tax @15% plus applicable surcharge and education cess on the capital
gains will be payable if redeemed within 12 months.
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Additionally, the dividend distributed from equity arbitrage funds are
tax free in the hands of the investor and no dividend distribution tax is
deducted.
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