Sometimes we are tempted in taking a
little risk for that extra dollop of cream. We don’t mind diving more than few
times in wrong kind of investment as
long as we are assured to earn profit in at least 1of 10 times. It’s a
bad ratio absolutely if it means you are risking your goal corpus to get the
extra something over your normal return. So today we would discuss one such
product which gives you an opportunity to earn just a little more with our
risks calculated and reduced to lowest.
What
is Arbitrage Fund?
Arbitrage is basically when you get
an opportunity to earn profit between two different markets due to inefficiency
in market pricing.
It
is a mutual fund category that capitalizes on the difference between price of
equities in the cash and derivative markets for generating returns.
So
how does the Arbitrage fund work?
Let’s
take an example: At the start of August, Fund A buys Infosys Ltd shares (INFY)
for Rs. 1,000/share and sells INFY August futures at Rs. 1,020. This strategy
envisages that you expect the stock price to fall in future.
|
Type of Instrument
|
Scenario I
|
Scenario II
|
|
Price
on settlement
|
1040
|
970
|
|
Cash Segment
(profit/loss)
|
40
(1040-1000)
|
-30(970-1000)
|
|
Future Segment
(profit/loss)
|
-20(1020-1040)
|
50(1020-970)
|
|
Profit / loss on
purchase of stock future
|
20
|
20
|
In
Scenario I, when the price of stock on settlement date if the price of any
particular stock increases to the purchase price, the envisaged strategy is
proven wrong and the investor would make loss in future market, although in
cash market it would be a profit. However, since the profit earned is more than
the loss on future, overall the investor makes profit.
Similarly
in scenario II, the price of stock has fallen and the investor makes profit in
the future market and loss in cash market. However, the total gain is similar
as in Scenario I.
So,
irrespective of whether a particular stock price rises or falls, the price risk
is hedged and the consumer losses are almost negligible.
Taxation in an Arbitrage Fund
·
Arbitrage funds are categorized under
equity mutual funds for taxation purpose.Hence, like any equity based mutual
funds, any holding beyond one year is considered as long term and tax free. For
short term, i.e. within a year’s time frame, is taxed at 15% flat.
·
Also, dividend received is tax free in
hands of investors.
Summarize, the Arbitrage Fund –
·
Ideal investment to take benefit for short
term period, recommended holding more than a year to avoid taxation.
·
It can be seen as an alternative to short
term debt funds to park funds. Although, it is advised that not more than 5% of
your total portfolio should be parked in it.
·
It is used as a hedge instrument and not
seen as a wealth making tool. So if in case you want to park your contingency funds
in this particular type of mutual funds, it can be used over liquid funds.
Some
of the leading Arbitrage Funds are as follows:
|
Fund
|
Launch
|
Expense
|
1-Year
|
Net Assets (Cr)
|
|
|
Ratio (%)
|
Return (%)
|
||||
|
Indiabulls Arbitrage Fund - Regular Plan
|
Dec-14
|
1.06
|
6.85
|
173
|
|
|
IDFC Arbitrage Plus Fund - Regular Plan
|
Jun-08
|
0.95
|
6.71
|
375
|
|
|
HDFC Arbitrage Fund - Wholesale Plan | Invest Online
|
Oct-07
|
0.75
|
6.64
|
2,083
|
|
|
Edelweiss Arbitrage Fund - Regular Plan
|
Jun-14
|
1.05
|
6.64
|
1,122
|
|
|
Kotak Equity Arbitrage Fund Regular Plan
|
Sep-05
|
1.14
|
6.49
|
3,633
|
|
|
ICICI Prudential Equity Arbitrage Fund
|
Dec-06
|
0.96
|
6.44
|
4,593
|
|
|
L&T Arbitrage Opportunities Fund - Regular Plan
|
Jun-14
|
0.84
|
6.43
|
238
|
|
|
Invesco India Arbitrage Fund
|
Apr-07
|
1
|
6.41
|
605
|
|
|
UTI SPrEAD Fund
|
Jun-06
|
0.86
|
6.32
|
672
|
|
|
DHFL Pramerica Arbitrage Fund - Regular Plan
|
Aug-14
|
1.22
|
6.31
|
745
|
(Source – www.valueresearchonline.com)
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