{"id":31021,"date":"2024-12-09T10:22:26","date_gmt":"2024-12-09T04:52:26","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=31021"},"modified":"2024-12-09T10:22:30","modified_gmt":"2024-12-09T04:52:30","slug":"are-arbitrage-funds-right-for-you","status":"publish","type":"post","link":"https:\/\/www.fundsindia.com\/blog\/mf-research\/are-arbitrage-funds-right-for-you\/31021","title":{"rendered":"Are Arbitrage Funds right for you?"},"content":{"rendered":"\n
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What are Arbitrage Funds?<\/span><\/strong><\/h3>\n\n\n\n

Arbitrage Funds<\/strong> are Debt Oriented<\/strong> Hybrid Funds<\/strong> which invest<\/strong> in a mix of Arbitrage and Debt\/FDs. <\/strong>They usually have 65-75% of their portfolio<\/strong> in \u2018Arbitrage\u2019 investments<\/strong> and the remaining 25-30% in \u2018Debt\/FDs\u2019<\/strong>. <\/p>\n\n\n\n

Over a 6 month to 1 year period, arbitrage fund returns are typically comparable to liquid fund returns. <\/strong>But unlike liquid funds whose returns are taxed as per your tax slab, arbitrage funds enjoy equity taxation<\/strong> as the funds maintain more than 65% exposure to arbitrage investments<\/strong>. <\/p>\n\n\n\n

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For any fund to qualify for equity taxation, the exposure to Indian equities must be above 65% of the portfolio. In Arbitrage funds, though the returns from the arbitrage portion are similar to a debt liquid fund, it is considered as equity from the tax angle as it involves buying a stock in the cash market (that is the stock market) and selling it in the futures market. <\/p>\n\n\n\n

How do they work?<\/span><\/strong><\/h3>\n\n\n\n

Arbitrage Funds work on the arbitrage principle<\/strong> where they take advantage of pricing differences of a particular asset, between two or more markets. It captures risk free profit on the transaction.<\/p>\n\n\n\n

One of the most commonly used strategies by arbitrage funds is the Cash Future Arbitrage. <\/strong>Under this strategy, arbitrage funds simultaneously<\/strong> buy<\/strong> stocks <\/strong>in the cash market <\/strong>and sell them in the futures at a slightly higher price <\/strong>thereby locking the spread (risk free profit)<\/strong> at initiation. At expiry, future price converges with actual stock price and accordingly gain is realized. <\/p>\n\n\n\n

Example:<\/p>\n\n\n\n

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What should be the return expectation from arbitrage funds?<\/span><\/strong><\/h3>\n\n\n\n

Let us evaluate this by comparing the average returns of the Arbitrage Funds category (largest 5 funds) vs Liquid Funds category over the last 10 years.<\/p>\n\n\n\n

<\/div>\n\n\n\n
Insight 1: Over 6 month time frames, Arbitrage Funds have underperformed liquid funds on a pre-tax basis but outperformed on a post-tax basis.<\/span><\/strong><\/h5>\n\n\n\n
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64% of the times arbitrage funds have outperformed liquid funds on a post-tax basis with an average outperformance of 0.2%!<\/em><\/strong><\/p>\n\n\n\n

<\/div>\n\n\n\n
Insight 2: Over 1 year time frames, Arbitrage Funds have underperformed liquid funds on a pre-tax basis but outperformed on a post-tax basis.<\/span><\/strong><\/strong><\/h5>\n\n\n\n
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93% of the times arbitrage funds have outperformed liquid funds on a post-tax basis with an average outperformance of 0.7%!<\/em><\/strong><\/p>\n\n\n\n

Takeaway: <\/span><\/strong><\/h4>\n\n\n\n