What Are Arbitrage Funds?
What are arbitrage funds? Can they give negative returns? How are they taxed? Arbitrage schemes are hybrid funds that take arbitrage positions in equity and equity-related instruments for at least 65% of the portfolio. The remaining corpus is mostly in high-quality fixed-income instruments, cash & equivalents. So How Does It Work? Arbitrage funds aim to capture the price differential between the spot and futures markets, to generate returns at stock exchanges. These mutual funds buy securities in the spot market and simultaneously sell them in the futures market. They buy the stock in the lower-priced spot market and sell it in the higher-priced futures market. The spread differential in the market typically reflects the rates in the money-market rates. This spread differential rises in times of high volatility in the markets, which presents an opportunity for investors to capitalize on the higher rates (relative to money market rates)...