Arbitrage Funds

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.