Investors’ interest in arbitrage funds is increasing. Net investment of Rs 16 thousand crore was made in April.Market volatility is used to generate returns.
New Delhi. There is a lot of volatility in the stock market these days. India Volatility Index (India VEX) has increased in the last few days. Due to this, it is feared that the volatility in the market will not stop yet. India VEX reflects the possible volatility in the market in the near term. Today i.e. on 16 May, it has crossed 20. This is the highest level of this index after January 30, 2023. India VEX usually rises before important occasions like general elections. It also jumped in 2019 and 2014.
The volatility of the market has a direct impact on the returns of investors. But, you can also earn profit by investing in one place in the volatility of the market. You can invest money in Arbitrage Fund at this time. Arbitrage funds use volatility to generate returns. The special thing is that the interest of investors in arbitrage funds is increasing. A net investment of Rs 16 thousand crore was made in arbitrage funds in the month of April. The total asset under management (AUM) of funds of this category went above Rs 1.90 lakh crore. During the financial year 2023-24, a net investment of Rs 90 thousand crore was made in arbitrage funds.
What is an arbitrage fund?
Arbitrage funds fall under the category of equity funds and are better than debt funds in terms of tax. At least 65 percent of their investment is in equity. The rest is invested in debt and money market instruments. Arbitrage funds generate returns by taking advantage of the difference in the price of a stock in the cash and future (derivative) segments of the equity market. During volatility in the stock market, the difference in prices between the two segments i.e. the spread increases. When there is more volatility in the market, these funds give higher returns.
How is money earned?
Arbitrage funds buy shares from one segment at a lower price and sell them at a higher price in another segment and earn profit. For example, the price of one share of a company is Rs 200 in the cash segment and Rs 205 in the future/derivative segment. The arbitrage fund manager buys 100 shares of the company for Rs 20,000 in the cash segment and sells them for Rs 20,500 in the derivative segment and earns a profit of Rs 500. Yes, you will get returns only if the price of the share remains the same in the cash and derivative segments at the time of expiry of the future contract.
If the price of the same share falls to Rs 195 in the cash segment and Rs 190 in the derivative segment at the time of expiry of the futures contract, then in this case there will be a loss of Rs 5 per share i.e. Rs 1000 in the cash market, while in the derivative segment there will be a profit of Rs 15 per share i.e. a total of Rs 3000. This means that the fund manager will have a net profit of Rs 2,000.
taxation
Arbitrage funds fall under the equity mutual fund category. Therefore, it is taxed like equity. If you redeem in less than a year, the income will be considered as short-term capital gain and you will have to pay 15 percent (plus 4 percent cess) short-term capital gain tax. If you redeem after a year, the income will be considered as long-term capital gain and you will have to pay 10 percent (plus 4 percent cess) long-term capital gain tax on income of more than one lakh rupees annually.
(Disclaimer: The information given here is based on mutual fund performance. If you want to invest money in any of these, then first consult a certified investment advisor. News18 will not be responsible for any kind of profit or loss of yours.)
Tags: Money Making Tips, Mutual fund, Stock market
FIRST PUBLISHED : May 16, 2024, 14:55 IST