Best Arbitrage Mutual Funds To Invest In 2019

Arbitrage fund is a type of mutual fund that has the characteristic of having low-risk and works well in an unstable or volatile market. In an arbitrage fund, the fund manager earns profit for the investor by simultaneously buying shares in the cash market and selling it in the derivatives market. Essentially, the difference between the cost and selling price is the return earned by the investors.

Here’s an example to understand how arbitrage funds in India work – A company’s stock is trading at Rs. 2000 in the cash market and Rs. 2500 in the derivatives market. Therefore, when investors buy the share from cash market and sell in the derivatives market, simultaneously, they earn a profit of Rs.500 per share. To earn a consistent gain, arbitrage funds need to execute a large number of trades each year

The best arbitrage funds buy from the cash market for a low price and sell in the future market for a higher price, and hence use the stock markets volatility to the advantage of the investors. Greater the uncertainty and instability in the market, greater is the profit for the investors.

Features Of Arbitrage Funds

The main purpose of best arbitrage mutual funds is to provide greater returns to investors who look for a low-risk investment. The market price is often fluctuating and investors fear to lose their money, but these funds do not let market uncertainty and instability affect the investments and returns of the investor, rather prove it to be a blessing for them.

In cases where there is low arbitrage opportunity, the fund manager allocates the remaining asset in other income-generating instruments that have high-credit quality like zero-coupon bonds, debentures, and term deposits.

Being a good option for the risk-averse individual, arbitrage funds can also profit from trading stocks on different exchanges, for example, Purchase of a stock of $75 on the ABC stock exchange and selling it for $75.25 on the XYZ stock exchange. Arbitrage funds lead investors towards greater returns in all ways possible.

Taxability of Arbitrage fund

Tax treatment of arbitrage funds is equal to that of equity funds, as they invest mostly inequities.

The returns earned by holding arbitrage funds for more than a year are tax-free; these are known as long-term capital gains (LTCG). A 15% tax is levied on income from these funds in the first year, and it’s known as a short-term capital gain (STCG). There is no dividend distribution tax on these funds, but when the stock market is unstable, investors can reap dividends.

However, it is important to note that even the best performing arbitrage mutual funds will only benefit investors in the long run and to gain tax benefits, investors should hold it for about a year.

Major Advantages Of Arbitrage funds

Arbitrage funds have a lot of advantages, some of them are listed below:-

Low risk – As these funds are simultaneously bought and sold, there is not much risk involved if one is in for long-term investment. Arbitrage funds also invest a bit of their capital in the highly stable debt securities.

Work well in a volatile market – It is one of the few kinds of low-risk funds that work profitably in a highly volatile market. As individual stock prices have a lot of difference in a volatile market, arbitrage funds get to use it to advantage by the simultaneous buying and selling in different markets. Investors who look for low-risk but greater returns in a volatile market can consider arbitrage funds as a viable option.

Taxed as equity funds – If one holds their shares in an arbitrage fund, (which are treated as equity funds), for more than a year then gains received are taxed at the capital gains rate and not income tax rate. Capital gain rates are lower than income tax rate; hence arbitrage funds have a tax advantage.

Best Performing Arbitrage Mutual Funds In India 2019

As per performance in the last 5 years, here is a list of best performing arbitrage mutual funds in India 2019.

Best Arbitrage Funds 2019
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Reliance Arbitrage Fund Direct Growth 7.52% 7.05% 7.42% 0.51% 168% Hybrid
Moderately Low
Axis Arbitrage Fund Direct Growth 7.36% 7.01% 7.32% 0.27% 623% Hybrid
Edelweiss Arbitrage Fund Direct Growth 7.39% 6.92% 7.36% 0.4% 1326% Hybrid
Moderately Low
IDFC Arbitrage Fund Direct Growth 7.51% 6.85% 7.15% 0.4% 194% Hybrid
Moderately Low
ICICI Prudential Equity Arbitrage Direct Growth 7.19% 6.78% 7.16% 0.37% 1077% Hybrid
Kotak Equity Arbitrage Fund Direct Growth 7.15% 6.77% 7.17% 0.49% 187% Hybrid
Moderately Low

This list is in no way a recommendation, but just a compilation of best performing arbitrage funds. Please invest keeping in mind your risk profile and investment goals.

Disclaimer: The views expressed in this post are that of the author and not those of Groww

Asset Management Company
Axis Mutual Fund DHFL Pramerica Mutual Fund Principal Mutual Fund
Kotak Mutual Fund Sundaram Mutual Fund BOI Axa Mutual Fund
Reliance Mutual Fund Invesco Mutual Fund Union Mutual Fund
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SBI Mutual Fund JM Financial Mutual Fund Edelweiss Mutual Fund
ICICI Prudential Mutual Fund Baroda Pioneer Mutual Fund Essel Mutual Fund
Aditya Birla Sunlife Mutual Fund Canara Robeco Mutual Fund Mahindra Mutual Fund
UTI Mutual Fund HSBC Mutual Fund Quantum Mutual Fund
Franklin Templeton Mutual Fund IDBI Mutual Fund PPFAS Mutual Fund
IDFC Mutual Fund Indiabulls Mutual Fund IIFL Mutual Fund
DSP Blackrock Mutual Fund Motilal Oswal Mutual Fund Escorts Mutual Fund
Tata Mutual Fund BNP Paribas Mutual Fund
L and T Mutual Fund Mirae Asset Mutual Fund