Consider parking your Surplus Funds in Arbitrage Fund category

What is the meaning of “Arbitrage”?

Arbitrage, conceptually, is an investment strategy in which an investor simultaneously buys and sells an asset in different markets to take advantage of price differences, and generates a profit. This price difference is termed as “spread”. Arbitrage fund category use such a technique to generate returns.

What are Arbitrage Funds?

Arbitrage Fund category predominantly seek to generate income through arbitrage opportunities between the price of a stock and its price in the futures market. During most market conditions, this difference (the Spread) happens to be a reflection of the prevailing money market interest rates. These funds are generally considered to be an ideal investment vehicle for horizons higher than 3 months.

> A Liquid Fund category or An Arbitrage Fund category?

While the suggested investment horizon in Arbitrage Funds category is 3 to 6 months, the relatively less risky nature of such funds, and the aforementioned investment horizon cause investors to face the dilemma of investing between Liquid and Arbitrage Fund categories. But the objectives of both these categories of fund are different in an investor’s portfolio.

If your investment horizon is a minimum of 3 months, you may consider parking your surplus funds in the Arbitrage fund category. However, for an investment horizon less than 3 months, you may consider parking your surplus funds in Liquid Fund category (suggested investment horizon in such funds is 7 to 91 days).

> Tax Efficiency

The short-term capital gains (units held for 12 months or less) of investments in arbitrage fund category are taxed at 15%, like an equity-oriented fund. As a result, the post-tax returns of Arbitrage fund category tend to be more efficient than certain debt fund categories considered for parking surplus funds.

Furthermore, such tax-efficient returns in Arbitrage fund category become even more apparent when interest rates rise. The reason being that since spreads in Arbitrage markets reflect interest rates prevailing in money market instruments, the returns of Arbitrage fund category also tend to move in line with money market rates.

For information on “HDFC Arbitrage Fund”, kindly visit

https://www.hdfcfund.com/product-solutions/overview/hdfc-arbitrage-fund/direct#overview