Arbitrage Funds Returns, Taxation, Dividend & Risk

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In finance, the word arbitrage generally refers to “profit without risk”. Similarly, arbitrage funds are the funds that can give good profit without taking significant risks in investments. Below we have covered a few sub-topics to have complete knowledge.

What are arbitrage funds?

Arbitrage funds are not like equity funds or hybrid funds.

  • These funds take advantage of the price differences between the returns of selling and purchasing of securities. Hence, these funds invest in short term debt.

Can arbitrage funds give negative returns?

  • Arbitrage funds are indeed a low-risk investment. However, it does not imply that it cannot give negative returns.
  • These funds are highly volatile and have an unpredictable payoff. Moreover, if the arbitrage fund is withdrawn before the expiry date, there is a high chance of negative return.

Best arbitrage funds of 2020

Here’s a list of best performing arbitrage funds of 2020.

  • BNP Paribas Arbitrage Fund.
  • L&T Arbitrage Opportunities Fund.
  • SBI Arbitrage Opportunities Fund.
  • Edelweiss Arbitrage Fund.
  • Aditya Birla Sun Life Arbitrage Fund.
  • Nippon India Arbitrage Fund.
  • Kotak Equity Arbitrage Fund.

Arbitrage funds Taxation in 2020

  • Arbitrage funds are taxable.
  • The taxation on arbitrage funds is similar to that of equity funds.
  • If these funds have been held for more than one year, the capital gain is taxed as per the Long Term Capital Gain (LTCG) rate. It is generally lower than the income tax rate.
  • LTCG rate is 10% with indexation. However, long term capital gain up to Rs. 1 lakh is tax-free.

Arbitrage fund dividend taxation

Dividends earned from these funds are tax-free. However, the AMC has to pay dividend distribution tax (DDT) at the rate of 11.648%.

Are arbitrage funds better than liquid funds?

Arbitrage funds provide a better return than liquid funds. Moreover, these funds are more tax-friendly. However, Liquid funds are considered to be far better than arbitrage funds in terms of liquidity.

STP from arbitrage fund

  • Systematic Transfer Plan (STP) is a profitable scheme to invest in an arbitrage fund. However, STP from the arbitrage fund would make it taxable at Short Term Capital Gain (STCG) rate.
  • STP from arbitrage after one year of investment can give a better return even after deducting tax.

Arbitrage funds risk

Arbitrage funds are ideally low- risk investment for the long-term. Though these funds are highly volatile, there is almost no risk involved in the investment. It may seem risky to an investor in two cases-

  • First, if there is a lack of arbitrage opportunities in the market.
  • Second, if the investor is planning for a short term investment.

Arbitrage funds calculator

There are several online arbitrage funds return calculators. You have to fill up the details. It will display the expected returns. You can calculate the returns even before investing in the fund.


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