What are arbitrage funds? Can I invest in them?
Arbitrage Funds are Mutual Funds that take advantage of temporary price differentials of the same asset in the cash market and the derivative market.
The cash market is where shares are bought and sold at market or limit price for delivery. You pay the actual price of the shares prevalent at the time of purchase and the shares are delivered to your account.
The derivative market is different. Here, you can transact at a future date by fixing the price today. For example, you can agree to buy or sell one kilogram of Gold or a specific number of shares after a year at a price decided today. If the actual price after a year is more than what you decided today, you make a profit if you are buying or a loss if you are selling. If the actual price after a year is lesser, the situation reverses.
Arbitrage Funds are for conservative investors who cannot take the risk associated with pure equity investing through Mutual Funds. Arbitrage Funds are a low-risk investment with average returns. They are very similar to Debt Funds where the risk is low.
However, what works in favour of Arbitrage Funds over Debt Funds is the tax advantage associated with it. Since Arbitrage Funds are categorised as equity funds, the capital gains tax is nil for long- term investments, i.e. for more than a year. In case of Debt Funds, the taxes are both for short-term and long-term capital gains.
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