Arbitrage Mutual Funds: Top Options to Consider in February 2025
Arbitrage funds use arbitrage strategies, which involve the buying and selling of assets in different markets to earn profit arising from price differences. The fund managers in this scheme look for arbitrage opportunities and make a profit through the price difference between the cash and the derivatives markets. In case there are no arbitrage opportunities in the market, the fund manager may also invest in debt securities and equities.
Taxation in Arbitrage Mutual Funds
When it comes to taxation, arbitrage funds are treated similarly to equity mutual funds. long term capital gains are taxed at 12.5% if investments are held for more than a year. While short-term capital gains are taxed at 20% for investments held for less than a year. The returns from arbitrage funds are not influenced by the interest rate regime , which makes it ideal for investors who prefer not to worry about interest rates.
Arbitrage Opportunities
A volatile market benefits arbitrage funds, as during the market fluctuations, there are more opportunities available for arbitrage funds. However, it should be noted that there will be times when there are fewer or no arbitrage opportunities in the market when the market is moving in a single direction and there is less volatility.
Here are the recommended arbitrage funds that can be considered while making an investment in arbitrage mutual funds in February 2025.
1) Nippon India Arbitrage Fund
2) Kotak Equity Arbitrage Fund
Benefits of Investing in Arbitrage Mutual Funds
1. Lower Risk: As the buying and selling of securities happen simultaneously, there is lower risk associated with this fund.
2. Short-Term Returns: Arbitrage funds are most suitable for investors who are looking for short-term gains.
3. Taxed as Equity Funds: As mentioned earlier, the arbitrage mutual funds are taxed the same way equity funds are taxed.
4. Better than Savings Accounts: Arbitrage funds are capable of giving higher returns as compared to savings accounts.
Drawbacks of Arbitrage Mutual Fund
1. Low Returns during a Flat Market: This investment is not suitable during the low volatility of the market.
2. High Expense Ratio: The expense ratio is quite high as this fund requires active management.
