ARBITRAGE FUNDS MADE SIMPLE FOR YOU
Are you one among those investors who are looking to have equity exposure but worried about the risk associated with it? Then Arbitrage Funds can be a moderate-risk investment option for you to park your surplus money from short term to medium-term perspective. The term “Arbitrage” in this context is the price difference or price inconsistency of the same instrument or stock in two different markets. Arbitrage Funds take advantage of these price inconsistencies or price differences to generate a return.
What are Arbitrage Funds?
Arbitrage Funds are equity-oriented funds under the hybrid category that simultaneously invests in the same instrument in two different markets (cash and futures) to generate returns. The minimum exposure to equity is 65% of the asset while the balanced portion is invested into debt segment. Funds in this category are most suitable for risk-averse investors who are looking for tax-efficient returns as compared to liquid or short term funds with a minimum investment horizon of 3 to 12 months.
How Do Arbitrage Funds Work?
All instruments do not trade at the same price in different markets. For instance, if shares of XYZ company trades at Rs.100 in the cash market and Rs.105 in the futures market, an arbitrageur or a fund manager can purchase XYZ's shares in the cash market and contracts to sell at a future date the equal quantity of the same in the future market,on a future date thus locking a spread of Rs.5 per share as profit.
Taxation in respect of Arbitrage Funds?
As per Section 112A of the Income Tax Act, arbitrage funds qualify as equity oriented mutual fund/scheme, provided it invests at least 65% of its proceeds in the equity shares of domestic companies listed on a recognized stock exchange and which is calculated with reference to the annual average of the monthly averages of the opening and closing figures . Funds in the category enjoy the benefits of equity taxation as applicable as on date. Equity Oriented Schemes are tax efficient as (i) LTCG upto Rs. 1 lakh in a financial year on equity oriented schemes is exempt from income tax and only STT is payable (ii) lower LTCG tax of 10% on LTCG of more than Rs 1 Lac, plus STT, and (iii) lower STCG tax @ 15% may be applicable compared to liquid and other debt investment options which are taxed as per marginal tax rates. *
What are the Advantages?
Arbitrage Funds are beneficial for the following reasons:
Who Should Invest in Arbitrage Funds?
Arbitrage Funds are suitable for an investor who is looking for:
What to Consider Before Investing in Arbitrage Funds?
As with any investment, here are some things you may want to consider before selecting the right scheme:
Takeaway
Arbitrage Funds are moderate-risk funds that are suitable for short-term parking of surplus funds that come with an equity taxation benefit.
*Disclaimers: The information in this document is provided for information purposes only and is in very brief and not exhaustive. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction. Users of this document should seek advice including tax advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies. The recipient of this material is solely responsible for any action taken based on this material. UTI AMC Ltd is not an investment or tax adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (represented through UTI Trustee Company Pvt. Ltd.) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising. Please read and understand the concerned SID, SAI, as amended, and other documents prior to making any decision.
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