{"id":29010,"date":"2022-07-29T04:50:07","date_gmt":"2022-07-29T04:50:07","guid":{"rendered":"https:\/\/www.tatacapital.com\/blog\/?p=29010"},"modified":"2023-06-23T12:18:39","modified_gmt":"2023-06-23T12:18:39","slug":"arbitrage-fund-taxation-invest-in-tax-efficient-funds-2","status":"publish","type":"post","link":"https:\/\/tata-blog.osian.dev\/moneyfy\/equity-funds\/arbitrage-fund-taxation-invest-in-tax-efficient-funds-2\/","title":{"rendered":"Arbitrage Fund Taxation – Invest In Tax-Efficient Funds"},"content":{"rendered":"\n

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\u201cNo risks, no gains.\u201d is a popular slogan around Dalal Street. But, if you are a risk-averse investor, you can still obtain good gains with minimal risks. One way you can achieve this is through arbitrage mutual funds<\/a>.<\/p>\n\n\n\n

Arbitrage means simultaneously buying and selling the same underlying security in different market segments to ensure risk-free profits. How does that work? The key point to note here is \u2018different market segments.\u2019 If the price of a security is different in different markets, you can buy it in the market where its price is low and simultaneously sell it in the market where its price is higher. Both the buy and sell transactions must occur simultaneously so that you do not expose yourself to the price movement risk.<\/p>\n\n\n\n

Let us now understand how this method comes into play in mutual funds.<\/p>\n\n\n\n

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How do arbitrage funds work?<\/strong><\/h2>\n\n\n\n

Most equity arbitrage funds make use of the cash-and-carry method to book profits. They buy shares of a company in the cash market and sell them in the futures market (or vice-versa), maintaining a profit position, irrespective of whether the stock price goes down or up.<\/p>\n\n\n\n

For example, suppose you buy a company\u2019s share at Rs. 2000 at the month\u2019s beginning. But there is speculation that the share price will go up later. So, you make a futures contract of the shares, for Rs. 2040, with a maturity date of one month later. At the end of the month, the arbitrage profit is the stock price difference in the cash and futures markets.<\/p>\n\n\n\n

Investors also use the same principle to earn arbitrage fund returns from the price difference of the same stock at various exchanges or indexes. However, due to the marginal profit from each sale, arbitrage schemes have to execute many trades every year to gain substantial profits. Also, to ensure maximum returns, you have to stay invested in these funds for at least three months. It helps in smoothing out daily volatilities and gives you stable arbitrage fund returns.<\/p>\n\n\n\n

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What are the tax benefits of arbitrage funds?<\/strong><\/h2>\n\n\n\n

Before we get into the tax benefits, let us first have a look at the typical composition of an arbitrage mutual fund scheme is:<\/p>\n\n\n\n