The stock market environment in India is complex and often unpredictable, and thus, people are always in a hope to find ways that would help them to achieve stable profits with less risks. However, arbitrage funds are one among those investing options which have recently come up in the market. Such funds attempt to make their profits going for trade at low risks with the gap of the same asset being traded in different markets. Now let’s discuss in detail the five peculiar advantages of investment in arbitrage funds.
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Low-Risk Investment Option
Conservative investors find arbitrage funds appealing since they are designed to be low-risk investing options. These funds aim to profit on price differences by simultaneously purchasing as well as selling assets in several marketplaces. By not placing a wager on the direction of the market, this method substantially eliminates market risk. Rather, it’s making money off of transient errors. Arbitrage funds are comparatively safe for investors who would like to dabble in equity mutual funds but are not too keen on undo exposure to stock market risks.
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Potential for Steady Returns
The ability of arbitrage funds to provide consistent returns is one of their most alluring features. The goal of arbitrage funds is to produce constant, but small, returns, in contrast to pure equities funds, which are susceptible to large market volatility. Usually, the returns are comparable to or marginally greater than those of short-term debt instruments. Because of this, investors wishing to park their money for short- to medium-term periods of time alongside generate returns that may outpace inflation may find arbitrage funds to be an appealing alternative.
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Tax Efficiency
The advantageous tax treatment that arbitrage funds enjoy in India contributes to their allure. Even though these funds have a lower risk profile, they are nonetheless classified as equity funds for tax reasons. This implies that long-term capital gains up to ₹1 lakh are tax-free for holders of arbitrage fund units for more than a year; earnings beyond this limit are subject to 10% tax. Gains that are held for less than a year are subject to a 15% tax. Investors in higher tax rates find arbitrage funds to be an appealing alternative due to their tax efficiency.
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Liquidity Advantage
For many investors, liquidity is an important consideration, and arbitrage funds do well in this area. These funds mostly make investments in readily acquired or traded derivatives along with highly liquid large-cap equities. The majority of arbitrage funds enable investors to redeem their units on any business day since they provide daily liquidity. Because of this characteristic, arbitrage funds offer flexibility in investment management and are a good choice for investors who might require quick access to their money.
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Portfolio Diversification Tool
A great method for diversifying a portfolio is an arbitrage fund. Their performance is not strongly correlated with the larger market movements since they have a limited connection with the debt in addition to stock markets. Introducing arbitrage funds to a portfolio appears to fund the capacity to reduce volatility within the portfolio for users. This diversification advantage comes as handy in volatile operations since one gets to stabilize the elemental performance of the arbitrage fund.
Conclusion
Arbitrage mutual funds are seen by many 5paisa investors operating in the Indian market as an interesting option because of the specific privileges that they offer. Investors are able to put them alongside investment portfolios because they give low risk, assured profitability, tax benefits, and tractability in addition to diversification benefits. As with any investment it becomes important to understand how arbitrage funds work, the risks involved and if they are suitable for investment.