Deepshikha | May 18, 2022 |
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 taxation of Debt Mutual Funds 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 offer a risk-free return and various tax perks.
Buying in one market and selling in another to take advantage of a brief price discrepancy in two marketplaces is arbitrage. An example can be used to demonstrate this.
For example, you might 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 deals are seen as risk-free. It’s also worth noting that the profit margin is relatively minimal because the gap between buy and sale prices is so tiny.
Arbitrage Mutual funds also arbitrage on the equity share markets in the same way as described above. They acquire shares in one market and sell them in another to take advantage of price disparities. They also profit from arbitrage by buying in the cash market and selling in the future markets.
Because the benefit of each deal is so tiny, arbitrage mutual funds must engage in hundreds of trades each year to make a fair profit.
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, i.e.,
Many consumers looking for safe and tax-free investment solutions prefer mutual funds since they offer various tax benefits.
The price variation between two marketplaces for the same goods is usually quite small. As a result, arbitrage mutual funds engage in hundreds of trades each year to make a profit. Furthermore, because the buying and selling occur at the same time, there is no danger because the goods have 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.
Fixed Deposits are the most popular alternative accessible if you want to invest in a safe income-earning asset. For your convenience, a comparison of Fixed Deposits and Equity Mutual Funds has been provided below.
| Particulars | Arbitrage Mutual Fund | Fixed Deposits |
Return on Investment | 8-10% (expected) | 8-9% (Guaranteed in Advance) |
Tax on Earnings | Tax-Free if held for more than 1 year. 15% Tax if held for less than 1 year. | 30% |
Effective return of investment after Tax | 8-10% | 5.6% – 6.3% |
| Complexity Level | A bit complicated for Layman to understand | Very easy to understand for Layman |
| Suitable for | 1-2 years of investment with tax-free returns, high liquidity and better returns than savings bank | A person looking for 100% surety and No or very less income tax is payable on his income. |
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.
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