News: Arbitrage funds are gaining attention as investors notice price gaps between NSE and BSE during volatile market phases.
About Arbitrage Funds
- Arbitrage funds are hybrid mutual funds that aim to earn returns by buying a stock at a lower price in one market and selling it at a higher price in another market at nearly the same time.
- The Securities and Exchange Board of India (SEBI) classifies arbitrage funds as equity-oriented funds and requires them to maintain at least 65 percent gross exposure to equities or equity-related securities.
- Key features
- Investment strategy: Arbitrage fund managers buy a stock at a lower price in the cash market and sell its Futures contract at a higher price, or exploit price differences between NSE and BSE.
- They execute trades almost at the same time to capture price spreads without predicting market direction.
- Risk Profile: These funds use hedged positions but are not risk-free.
- Returns depend on the availability of price gaps.
- When spreads are narrow or absent, returns may be modest.
- They are considered to provide relatively stable and moderate returns.
- Taxation: They are treated as equity-oriented funds because of the required equity exposure.
- Alternative Asset Class: They offer a market-linked and flexible option with easier redemption and generally no premature-withdrawal penalties, unlike fixed deposits.
- Investment strategy: Arbitrage fund managers buy a stock at a lower price in the cash market and sell its Futures contract at a higher price, or exploit price differences between NSE and BSE.
