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Aditya Birla Capital LimitedAditya Birla Capital Limited (“ABCL”) is a listed systemically important non-deposit taking Non-Banking Financial Company (NBFC) and the holding company of the financial services businesses. ABCL and its subsidiaries/JVs provides a comprehensive suite of financial solutions across Loans, Investments, Insurance, and Payments to serve the diverse needs of customers across their lifecycles. Powered by over 61,600 employees, the businesses of ABCL have a nationwide reach with over 1,690 branches and more than 200,000 agents/channel partners along with several bank partners.
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What is a Arbitrage Fund ?
An Arbitrage Fund is an open-ended, equity-oriented hybrid scheme that invests in equity market arbitrage opportunities.
Advantages of Arbitrage Funds
All-weather returns
Arbitrage funds have the ability to deliver returns in both bullish and bearish markets as they cash in on the price differential between spot and derivatives markets.
Portfolio diversification
Enjoy a diversified portfolio of equity arbitrage opportunities and get good returns on your investment.
Low risk
Arbitrage funds do not exhibit a high volatility risk despite investing in equity. This is because they invest in arbitrage opportunities, which are a hedge against risks.
Stable Returns
By profiting from price discrepancies, arbitrage funds can offer relatively consistent returns that are less dependent on the overall direction of the equity market.
Explore Arbitrage Funds
Most Popular
AUM: 23427(Cr)
Risk: Very High
- MIN. INVESTMENT 500
- 5 YRS RETURNS 33.32%
- Invest (Per Month) ₹10000
- Get (30 Yrs) ₹24,850*
*Projections/estimations is backtested using historical data.
Most Popular
- AUM: 23427(Cr)
- Risk: High
- MIN. INVESTMENT 1000
- 5 YRS RETURNS 33.32%
- Invest (Per Month) ₹15000
- Get (30 Yrs) ₹34,850*
*Projections/estimations is backtested using historical data.
Arbitrage Funds Returns Calculator
REGULAR INVESTMENT
SIP
Invest systematically in regular amounts and build a corpus with a disciplined investing habit.
START SIPONE TIME INVESTMENT
Lump sum
Invest once with the facility of lump sum investing and save at your will. Time the market correctly and earn good returns.
INVEST LUMPSUMTotal Amount Invested
₹ 0
after 30 years you will get a return of
₹ 0
Disclaimer: Projections/estimations is backtested using historical data.
Total Amount Invested
₹ 0
after 30 years you will get a return of
₹ 0
Disclaimer: Projections/estimations is backtested using historical data.
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Understanding Arbitrage Funds
Table of Contents
What are Arbitrage Funds?
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There are two types of equity markets - spot markets and derivatives markets. The price of an equity security differs in both these markets, creating arbitrage opportunities. Arbitrage Funds are equity-oriented hybrid funds which invest in these arbitrage opportunities and cash in on the price differential of the equity security under both the markets.
What are the features of Arbitrage Funds?
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Minimum 65% allocation in equity arbitrage opportunities
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The volatility risk is quite low, while returns are good
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Suitable for all investment horizons
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Invest through SIPs or lump sum
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Earn tax-free returns up to Rs.1 lakh if you stay invested for 12 months or more
What are the different types of hybrid funds?
Aggressive Hybrid Funds
Funds that invest 65% to 80% of their portfolio in equity and the rest in debt
Equity Savings Funds
Funds that invest in equity, debt and arbitrage opportunities. A minimum of 65% of the portfolio is invested in equity and 10% in debt
Balanced Hybrid Fund
Hybrid Mutual Funds which invest 40% to 60% of the portfolio in equity and the remainder in debt
Multi-Asset Allocator Fund
Funds that invest at least 10% of the portfolio in three different asset classes
Conservative Hybrid Fund
Hybrid funds which invest 75% to 90% of the portfolio in debt and the remainder in equity
How do Arbitrage Funds work?
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Arbitrage Funds collect investments from different investors and pool them into a corpus
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Fund managers identify arbitrage opportunities in the equity market
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Arbitrage opportunities are when the price of an equity security is different in the spot or cash market and the futures or derivatives market
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For instance, a share trading at Rs 400 in a spot market and Rs 410 in a futures market creates an arbitrage opportunity
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The fund manager can buy the security at Rs 400 from the spot market and sell it at Rs 410 in the futures market to make a profit of Rs 10
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Depending on the profit made through arbitrage opportunities, the value of the portfolio rises
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Risks are low since the price across the spot and futures market would differ even in a bearish market. Thus, fund managers can use this differential to make a gain
What is the tax implication of Arbitrage Funds?
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Arbitrage attract equity taxation on the capital gains earned since they primarily invest in equity arbitrage opportunities
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Returns up to Rs.1 lakh are tax-free if you stay invested for 12 or more months
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Returns exceeding Rs.1 lakh are taxed at 10%
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For redemption within 12 months, returns are taxed at 15%
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Dividends earned, if any, are taxed at your income tax slab rate
What are the payout options?
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Dividend option
Earn dividends on your investment at regular intervals
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Growth option
Accumulate the returns over the investment tenure and get a lump sum amount on redemption
Who should invest in Arbitrage Funds?
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New equity investors
You can benefit from the low volatility risk and enjoy stable returns
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Investors looking to invest in equity
If you want to invest in equity at a reduced risk, the Arbitrage Fund will be a good choice.
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Investors with a short-term investment horizon
If you want to invest for a short tenure, Arbitrage Funds can give better returns and tax efficiency than liquid funds
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FAQs On Arbitrage Funds
Arbitrage Funds make a profit based on price differentials in different markets. It is suitable for investors having a low-risk appetite who want to make profits in the short term from the volatile markets without taking too much risk.
Arbitrage Funds are low to medium risk investment which provides lower but stable returns compared to equity funds. The returns on Arbitrage Funds are determined by the arbitrage opportunities available in the market and the ability of the fund manager to capitalize on these opportunities. Arbitrage Funds generally tend to outperform liquid funds and FDs on average.
The risk factors of Arbitrage Funds are high expense ratios and unpredictable payoffs. Though these funds carry lower risk than pure-equity funds, it is affected by market volatility which may affect the price difference between futures and cash market thereby impacting the returns on the funds.
Arbitrage Funds are also affected by interest rate risk and credit risk. They are risky in the short run and may incur exit load if redeemed within one month.
Arbitrage Funds invest most of the amount in equity and equity-related securities and do well when the market is volatile. These funds are not suitable for aggressive investors as these funds provide lower returns compared to other equity funds. When selecting an Arbitrage Funds to invest funds, choose the one with a large corpus size, experienced fund manager and low expense ratio. You should also consider your investment horizon with a time of six months to three years before selecting an Arbitrage Fund. These funds are not meant for a long-term investment horizon of over five years.
Exit loads vary among different funds. Exit load is typically applicable on Arbitrage Funds if you redeem your investments before a specified period, i.e. within 15-30 days.
Arbitrage Funds can be withdrawn at any time as per convenience. It generally takes three to five days to be redeemed as compared to liquid funds which can be encashed the next working day and FDs which can be encashed in two working days. However, one must be aware of the exit loads which are applicable for withdrawing or redeeming the Arbitrage Funds before a certain period of 15-30 days, as applicable.
The investment horizon for Arbitrage Funds is typically six months to three years i.e. short to medium term investments. They are not suitable for very short-term or long-term investments. It provides good returns and dividends when the market is unstable. One should hold these funds for at least one year to get the tax benefits.
When the equity holdings of Arbitrage Funds in the cash market are held over and above 65%, these funds are taxed as equity funds even though it has a debt component. Arbitrage Funds sold within one year are taxed at 15% with applicable cess as short-term capital gains. However, if sold after one year, these funds will be taxed as long-term capital gains at 10%, with an exemption of up to Rs. 1 Lakh in a financial year. Long-term capital gains of up to 1 lakhs are tax-free. Hence, these funds are more tax-efficient in comparison to debt funds in the short term and can be considered by individuals in the higher tax bracket.
Arbitrage Funds are tailored for risk-adverse investors offering a safe option to invest your money. It offers a balance between risk and returns in comparison to other equity funds.
Arbitrage Funds are mutual funds which make a profit on price differentials in the cash (or spot) and derivatives market through simultaneous purchase and sale in cash and future markets. Simply, arbitrage implies taking advantage of the price difference of the same asset in two different markets at the same time. It enables buying a particular asset or financial instrument at a cheaper price from one market and simultaneously selling it at a higher price at other markets, resulting in risk-free returns.
Arbitrage Funds are hybrid mutual funds which leverage arbitrage opportunities in the market. Arbitrage Funds turn the market volatility to its advantage and reap benefits riding on market inefficiencies. These funds not only help you in hedging the market volatility but also provide more profits when the market is considerably volatile. The arbitrage opportunities exist only in the uncertain and unstable markets and market volatility does not entail higher risk for Arbitrage Funds. These funds may not be attractive to investors when the markets are certain and stable
The fund managers in Arbitrage Funds mostly invest in equities and derivatives when they find arbitrage opportunities to make profits through price differentials. In the absence of such potential opportunities, they invest in debt securities and short-term money instruments. Arbitrage Funds are generally equity-oriented with up to 65% of the funds being invested in equities and equity-related instruments.
Arbitrage Funds are generally liquid as these funds invest the money in highly liquid instruments such as equity, debt and equity derivatives. It takes 3-5 days to be redeemed and encashed.
Many mutual funds provide an option to invest in Arbitrage Funds through SIP where you can invest a predetermined amount in these funds at regular intervals.
FDs provide capital appreciation and guaranteed fixed returns, which is not the case with Arbitrage Funds. The returns on Arbitrage Funds are comparatively higher and depend on arbitrage opportunities and fund managers' strategies. Further, though Arbitrage Funds are safe and involve low risk, it is riskier than FDs as they invest in the equity market and profit from the market volatility.
Arbitrage Funds explore and grab price difference opportunities to make quick profits by buying at a low price and selling at a high price. These funds thrive in volatile markets, offer higher return potentials, tax benefits on long-term gains, and involve low risk. They ensure a balance between return and risk factors.
Types of Hybrid Mutual Funds
Equity-Oriented Fund
Other asset class funds
Debt Funds
Invest in debt securities for low risks and stable returns.
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Equity Fund
Give your savings the growth they deserve. Invest in Equity Funds and unlock the potential of long-term growth
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Invest in funds listed and traded on the stock exchange
Fund of Funds
Mutual funds that invest in other mutual funds both in India and globally
Index Fund
Passively-managed mutual funds tracking a particular index
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