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In this video we have covered the following questions related to Arbitrage Funds:
1. What are Arbitrage Funds?
2. How do Arbitrage Funds Work?
3. Are arbitrage funds risky?
4. What is the tax on Arbitrage Funds?
5. Should I invest in an Arbitrage Fund?
Arbitrage funds invest at least 65% of their assets in equity or equity related instruments. Balance is invested in high quality fixed income instruments or cash and cash equivalents. Arbitrage funds take advantage of the price difference between the spot prices and futures prices of a share. This is done by buying shares in spot at a lower price and selling same number of futures at a higher price. This ensures that a risk-free profit is locked in at the time of entry of the trade. Is there no risk in Arbitrage Funds? There is one major risk which is that in case there is no arbitrage trade possible, the return from these funds could be exceptionally low and much lower than even liquid funds. For tax purposes, arbitrage funds are categorized as equity funds. For holdings less than 1-year, short term capital gains tax is applicable, which is 15%. In case of long-term holdings of over 1-year, long term capital gains tax rate is applicable, which is 10% if the total capital gains in that year is more than Rs. 1 Lakh. Arbitrage Funds can be good option for investors who fall in the highest tax bracket and want to invest surplus funds for a period of 3 months to 1-year.
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