How are Arbitrage Funds A Low Risk Option?

In the post demonetization era many investors prefer financial saving rather than physical saving. Arbitrage funds are good investment option for such savings.

Arbitrage funds buys shares in cash segment and sell the futures for the same company in the derivative markets as long as they are trading at a reasonable premium. That is these funds exploit the price differential in the derivatives and cash segment. These funds won’t take a bare exposure to equities as each sell in futures is accompanied by buy in cash segment. These funds use CRISIL Liquid Fund index as its benchmark.

These funds are safe investment option as the fund manager creates neutrality by investing in cash market and selling in futures. Market volatility doesn’t add more risk in these types of funds. Returns on these funds depend upon the arbitrage opportunities between Spot and future market which are high in a bullish market.

These funds invest around 65 per cent of their corpus in equity or equity-related instruments owing to which a holding in these funds for more than a year makes it tax-free as long-term capital gain tax on equities is nil. Also dividend earned from the same also attracts zero dividend distribution tax. With these features, arbitrage funds seem to be the safer and easier investment option for the investors.