Posted By: Admin
What is arbitrage?
Arbitrage is the practice of taking advantage of a price between two or more markets. E.g. buying a share from National Stock Exchange (NSE) & selling it in Bombay Stock Exchange (BSE), it doesn’t have to be a stock it can be a commodity, currency etc. There will be a price difference because of demand and supply in the market & because of the volatility too. So fund managers use this opportunity and make profit. Arbitrage funds are essentially equity funds as these funds majorly invest in equity and generate returns.
How Arbitrage Funds Work?
A fund manager purchases a stock with a bullish view (price goes up) in the cash market & sells it in the derivative market (a financial security dependent on underlying assets and derives its price from fluctuations in assets) simultaneously. Since this is done simultaneously there is no naked exposure so that risk is largely limited.
For example, if a stock of ABC Ltd is trading at ₹50 and it is anticipated that the stock will raise up to ₹70 then the arbitrage funds will buy the stock in the cash market and sell it as a contract in the derivative market and generate returns.
How Arbitrage Funds get taxed?
These arbitrage funds are taxed as equity funds. If you hold the funds for more than one year it is considered as long term capital gain and taxed at 10.4% added cess exceeding 1 Lakh. If the fund is sold below one year it is considered as short term capital gain and taxed at 15.6% added cess.
Risk mitigated to fund?
Investors with a low risk profile can invest in an arbitrage fund, as there won’t be any big difference in prices, much loss is not possible. And gains will be little better than FD.
Investors who want to park their money from a year onwards can look at arbitrage funds. These funds have the ability to generate better tax adjusted returns as compared to one year Fixed Deposits and should surely be considered for investments by investors. So, What do you think?
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