When should we invest in Arbitrage Mutual funds?

When should we invest in Arbitrage Mutual fundsWhen should we invest in Arbitrage Mutual funds?

This post is based on request from Shiv Anand on “Suggest-a-topic” to write on arbitrage mutual funds. Generally mutual funds invest in a variety of stocks across sectors or in debt markets. Arbitrage mutual funds on the other hand en-cashes opportunities that arise when there is a difference between prices of an asset between two or more markets. In this article I would detail about when to invest in such Arbitrage Mutual funds and when not to invest in such funds.

Also read: Should you invest in Opportunities Mutual funds?

How exactly Arbitrage mutual funds work?

Arbitrage mutual funds work on any opportunity that comes up when there is variation between the prices of an asset under different market conditions. Below are the 3 scenarios.

  • The difference in price for a stock between BSE and NSE
  • Difference between spot market and future market for a particular stock
  • Difference between future contract of a month Vs futures contract for 2 months or 3 months.

Let me explain this with an example. Reliance stock price is around Rs 800. Now during market trading time in NSE it might be quoting Rs 805, but in BSE it might be still available at Rs 800. One can buy in BSE and sell at NSE and make a difference of Rs 5 per share (minus transaction charges).

When should we invest in such arbitrage mutual funds?

These arbitrage mutual funds are good to invest under the following conditions:

  • When volatility increases or prevails in the market
  • During political changes where markets are highly volatile

When we should avoid such Arbitrage funds?

  • When markets have stabilized there is no scope for volatility, hence investing in arbitrage funds would not yield much returns.
  • When interest markets are likely to head down, investing in debt mutual funds would be a good option instead of Arbitrage funds.

How the returns are comparable with other category of mutual funds?

The returns are generally comparable with liquid funds and would be around 7% to 8% per annum. Hence don’t expect high returns from such funds.

Does anyone is investing in such Arbitrage funds?

No doubt this is one of the good category of mutual funds, howeever they perform better during volatile markets. Below are the top Arbitrage mutual funds and their performance in last 5 years.

Top Arbitrage Mutual Funds-Oct-2013

What is the tax treatment for returns from Arbitrage funds?

One good part is that the returns from Arbitrage funds are taxed like equity funds. The reason is such funds invest in direct stock markets either in the spot market or futures market. Hence any returns for more than 1 year are treated as capital gain and the tax on that would be zero.

Also read: Invest in value mutual funds for high returns in all market conditions

Conclusion: Arbitrage funds are meant to provide good returns when markets are volatile. Hence if there is such a market condition, invest in arbitrage funds to reduce risk and get good returns, else invest in long term debt mutual funds to gain more.

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Arbitrage Mutual funds


  • Vikas

    Hi Suresh Sir,
    Nice article.

  • Akhilesh

    Hi Suresh,

    Almost 12 to 13 months ago you had written the blog on how to earn from ebay, but enable to do this as per your method and alsocan you please advise how to earn from facebook, twitter and google.

     I am interested to write hindi as well as English blog and read your article on this also but not able to executive so pls advise on this also.

     I have PC at home and want to do some online part time work so do you have any idea or any genuine company for this.

    Another thing I like is registering for domain name so pls advise is there is any rules and regulation and how to do this and what is the cost .




    • Akhilesh, If you are interested to start a blog, list down the list of items where you are interested. It could be anything. The cost to buy domain and hosting would be less than Rs 10,000. This is small cost, but your effort would be high. You may need to spend more than 4-5 hours per day. It may take 6 to 9 months to atleast people to notice that. Do you have patience ? If so, please go ahead and start it. You can find several ideas on earning money on my other blog allbusinessideasdotcom

  • shiv anand



    Thanks a lot for the topic.

    Do these funds gain in falling markets?

    Is this right time to invest? or should we wait till 2014 elections??

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