Arbitrage Funds: Invest these mutual funds in both stocks and bonds. The focus in shares is taken care of so that the change in share price is not affected, but the fund may give higher yields at some time than the availability of arbitrage in stock/future prices.
Arbitrage schemes were previously considered as an equity scheme for tax. This means that they prior enjoyed zero tax on long-term capital gains. This tax savings made him a favorite of investors of mutual funds, especially those with large amounts to park for a short period. Long-term capital gains of more than Rs 1 lakh in a financial year are re-introduced with a 10 percent tax after LTCG tax.
However, arbitrage of mutual fund schemes retains some of the benefits of mutual fund funds. Short-term capital gains from debt assets held for less than three years are added to revenue and taxed according to the income tax slab of the investor. Also, mutual debt fund investments are eligible for long-term capital gains tax if they are held for more than three years. Long-term capital gains are taxed at 20 percent on index mutual gains as well as debt mutual funds. Indexing benefits help investors increase the purchase price and reduce overall tax outgoing.
As previously stated, arbitrage funds enjoy better taxation as they are levied for taxation purposes such as equity mutual funds. Long-term capital gains are taxed at 10 percent on investments in arbitrage funds of more than one year. Short-term capital gains from mutual fund investments in arbitration for less than one year are taxed at 15%. This favorable taxation still gives debt mutual funds an advantage over arbitrage funds. Investors, particularly those in the higher income tax bracket, can use them for a short time to park cash.
Are you new to mutual funds? Here is how arbitrage funds perform. These mutual fund plans are designed to exploit the possibilities of arbitrage between money and future market. Necessarily, to achieve risk-free yields, these schemes seek a price distinction between the spot market and the derivatives market. In a volatile economy, the price difference will be more volatile. Therefore, volatility operates in favor of arbitrage mutual fund schemes.
Arbitrage mutual fund plans are anticipated to give marginally higher yields post-tax than debt mutual funds. Although this will not always happen. For example, in the last one year, about 5.90% has been offered in the arbitrage fund category.
Here are our suggested arbitrage mutual fund schemes that you may consider for investment:
- Kotak Equity Arbitrage Fund
- Reliance Arbitrage Fund
Note: Arbitrage Funds operate on the mispricing of equity shares in the spot and futures market. In short, to exploit returns, it uses the price difference between current and future securities. At the same time, the fund manager buys cash market stocks and sells them in the futures or derivatives market. The difference between cost price and selling price is the return you get.