All About Arbitrage Mutual Funds

All About Arbitrage Mutual Funds Since 2014, Arbitrage Mutual Funds have grown in popularity and have become the "Apple of Investors' Eyes" for those looking for a risk-free return on their investment. In this post, we'll look at what Arbitrage Mutual Funds are and whether or not you should invest in them as an investor. Many investors have begun to participate in Arbitrage Mutual Funds, particularly since Finance Minister Arun Jaitley modified the way Debt Mutual Funds are taxed in his 2014 Budget. Before 2014, Debt Mutual Funds enjoyed several tax advantages that have now been removed. Because Debt Mutual Funds are no longer profitable because they no longer provide tax benefits, many clever investors have switched to Arbitrage Mutual Funds, which provide a risk-free return and various tax perks.

What are Arbitrage Mutual Funds?

Buying in one market and selling in another to take advantage of a brief price discrepancy in two marketplaces is referred to as arbitrage. With the help of an example, this may be explained. For example, you may buy 100 kg of apples in Himachal Pradesh for Rs.150 per kg and sell them in Mumbai for Rs.151 per kg. It's worth noting that both transactions are completed at the same time. Because such trades entail simultaneous purchasing and selling, there is no risk of prices rising or falling over time. As a result, such trades are regarded as risk-free. It's also worth noting that the profit margin is relatively minimal because the gap between the buy and sale prices is so small. Arbitrage Mutual funds also arbitrage on the equity share markets in the same way as described above. To take advantage of price differences, they buy shares in one market and sell them in another. They also profit from arbitrage by buying in the cash market and selling in the futures market. Because the reward on each deal is so little, arbitrage mutual funds must engage in hundreds of trades each year to make a fair profit.

Tax on Sale of Arbitrage Mutual Funds

Arbitrage mutual funds invest a large portion of their assets in equities securities and are hence classified as equity mutual funds. Because these are classified as equity mutual funds, they are eligible for the same tax benefits as other equity mutual funds:

• In case of Long Term Capital Gains i.e. if the Arbitrage Mutual Fund is held for more than 1 year – Tax would be levied @ 10% w.e.f Financial Year 2018-19.
• In the case of Short Term Capital Gains i.e. if the Arbitrage Mutual Fund is held for less than 1 year, the capital gain tax would be levied at a flat rate of 15%.

Many consumers who are looking for safe and tax-free investment solutions prefer mutual funds since they offer various tax benefits.

Returns of Arbitrage Mutual Funds

The price difference between two marketplaces for the same goods is usually extremely small. As a result, arbitrage mutual funds engage in hundreds of trades each year to make a profit. Furthermore, because the buying and selling take place at the same time, there is no danger because the product has already been sold. Although these mutual funds do not guarantee returns, annual returns typically range from 8% to 10%. There are frequently arbitrage possibilities when the stock markets are volatile, thus the returns tend to be larger in years when the markets are turbulent. The higher the volatility, the greater the return; conversely, the lower the volatility, the lower the return. The return is estimated to be in the region of 8-10% during regular periods of volatility.

Are Arbitrage Mutual Funds a Good Investment?

If you pay the highest tax rate, say 30%, arbitrage mutual funds will most likely provide a better return on investment than fixed deposits. If you have nil or low tax rate on your overall income for the year, you should consider investing in Fixed Deposits or Arbitrage Mutual Funds.