Definition
Arbitrage Fund
An arbitrage fund profits from price differences between the cash and futures markets, delivering low-risk returns while being taxed as an equity fund.
An arbitrage fund simultaneously buys a stock in the cash market and sells its futures contract, locking in the spread regardless of which way the market moves. SEBI requires a minimum 65% in such hedged equity positions, which makes the fund equity-taxed.
Returns are typically similar to short-term debt funds but with the tax efficiency of equity treatment. They are popular with investors in higher tax brackets parking money for a few months, especially as a tax-efficient alternative to liquid funds.
Related terms
- Futures ContractA futures contract is a binding agreement to buy or sell an asset at a fixed price on a set future date, with both parties obligated to honour it.
- HedgingHedging is taking an offsetting position to protect a portfolio against adverse price moves, like insurance for your investments.
- Equity Savings FundAn equity savings fund blends equity, arbitrage and debt so that it holds enough total equity to qualify for equity taxation while hedging much of it to keep volatility low.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.