Arbitrage Mutual Fund

 

Arbitrage mutual fund is a hybrid category of mutual fund. A hybrid fund is simply one of the major types of mutual funds in which the funds invest two or more asset classes. Arbitrage is a method in which one buy in the spot or cash market and sell equivalent quantity in the future markets. The price difference between the spot and future markets creates profits. This is accomplished through the use of derivatives, which are categorised as equity securities. Because there is no directional call in this activity, the volatility of return is lower, and it tends to produce debt like returns. Arbitrage fund typically invest 65% to 100% of their assets in stock (through derivatives) and 0% to 35% in debt instruments.

Investor prefers these funds as they are treated as equity funds for taxation which significantly increase post-tax returns. Arbitrage funds rank high when it comes to safety. This is because the fund manager creates a market neutral position by buying in the cash market and simultaneously selling the same security in the future market. Such scheme does not take a naked exposure to any individual stock or index as each buy transaction in the cash market has a corresponding sell transaction in the future market.