Arbitrage
InvestmentsArbitrage is simultaneously buying and selling the same asset in different markets to profit from price differences. Arbitrage mutual funds exploit the price difference between the cash market (NSE/BSE spot prices) and futures market. They are taxed like equity funds but carry very low risk.
In detail
Arbitrage fund mechanics:n1. Fund buys Reliance shares on NSE at Rs 2,850 (spot)n2. Simultaneously sells Reliance April futures at Rs 2,870 (higher price)n3. Difference Rs 20/share is locked-in profitn4. At futures expiry: position closes, Rs 20 profit realisedn5. Roll: simultaneously open May futures position for next month's arbitragennReturns: typically repo rate equivalent (6.5-7.5%), with low volatility. Taxed as equity (STCG 20% if sold within 1 year, LTCG 12.5% after 1 year). Better than liquid funds for investors in 30% bracket holding for 12+ months.
Formula
Real-life example
Priya is in 30% tax bracket. She has Rs 5L for 15 months. Options: Liquid fund (7.2%, taxed at 30% = 5.04% net) vs Arbitrage fund (7.0%, STCG if sold before 12 months, LTCG 12.5% after 12 months = 6.125% net). Arbitrage fund nets Rs 11,000 more for 15-month holding due to equity tax treatment.