Arbitrage funds have come out to be one of the investment options many people are giving a thought to. While there are both pros and cons to this form of investment, as it is for others, it is important to read about it before you decide to invest in it. First and foremost, it is important to figure out what is arbitrage fund is and what are the things to remember about them. So, without further ado, let us begin.
What is Arbitrage Fund?
Arbitrage fund has a different way of working than other funds. It is nothing but the difference between the value of the current price and their future options of a share. Fund managers trade funds of the investors between different markets to make a profit out of the difference. If the value of a stock is higher in the futures market than in the equity market, the shares from the equity market are brought and sold into the futures market. This might seem a pretty simple and profitable thing to do. But a lot of things need to be taken into consideration to invest in arbitrage fund. Let us take a look at what they are:
Timing is Important
To make a profit, it is essential to time the trading. What the fund managers do is trade the shares of a company whose values show a difference in two different markets. The current market is also known as the cash market and the other market we are talking about is the future market. Let us understand this with the help of an example:
Suppose a company’s share value in the cash market is Rs 100 and in the futures market it is 105. In that case, the fund manager will sell the shares in the futures market to make a profit of Rs 5.
The important thing to keep in mind here is that it is a continuous process. One has to do the trading at the right time to cover the expenses of the fund manager and then save something for one’s profits.
Arbitrage funds work the best when the market is volatile. If the share market is showing signs of uncertainty, then the futures market brims with new opportunities. On the other hand, if you are investing in an arbitrage fund when the market is going to be stable for a certain period of time, then you are not going to make much profit from your investments.
Not Meant for Very Short-term
Arbitrage fund is very safe but as a consequence of this, you will not be able to make much profit out of it. So, if you think you will invest money in it today and expect a handsome return in the following week, this is not how it works. To make effective use of your investment, it is important that you invest the fund at least for six months to a year.
A great advantage that you can derive from arbitrage funds is that they are treated as equity funds. So, if you hold these funds for more than a year, then the profit that you make out of your investment will be considered long-term capital gain and will be taxed accordingly.
Since a fund manager has to actively manage these funds, the commission or fee charged on arbitrage funds is significantly higher than many other forms of investment. So, if you are not making much profit these funds will not have such importance.
These are some of the important things to keep in mind about arbitrage funds. There are many other points of consideration which you should pay heed to if you are planning to invest in the arbitrage fund.