With returns on fixed deposit and liquid funds coming down, owing to the end in the bullish rally in the market and the commodity market having an extremely bearish year, an investor might look for newer avenues to make his money work for him. Here is where arbitrage funds come into the picture.
Arbitrage is making money by buying and selling simultaneously the same contract in different market places. For example, SBI maybe offered in BSE at 240 but in NSE, there might be a bid at 250. So, an arbitrage fund awaits such opportunities. One has to quickly buy in NSE and sell in BSE, hence making a Rs. 10 profit.
This is clearly a hypothetical situation because such differences in prices between exchanges are rarely seen owing to electronic trading that keeps the price differences at less than 0.1% which might not even cover up for the transaction cost or the cover up for the low risk involved in such trades. However, in volatile markets such opportunities become abundant. In 2015, we have seen more than 20 days of more than 500 points intraday range(extremely volatile), hence a good time to invest in arbitrage funds. Arbitrage funds have returned more than liquid funds and fixed maturity funds this year. ICICI Prudential Blended Plan B Direct, Reliance Arbitrage and Edelweiss Arbitrage funds have given yearly returns of 9.8%, 9.0% and 8.8% respectively as on 30th Sept 2015.
Another factor that makes these funds attractive is that they are equity based and from the point of view of taxation, if held for 12 months or longer, the returns on these bonds are tax free.
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