Arbitrage fund alluring investors due to Tax advantage

Arbitrage funds are gaining traction as is reflected in the increasing Assets Under Management (AUM). The AUM for the arbitrage funds has risen by Rs 3400 crore. The total AUM under the category has touched Rs 26,637 crore according to media reports.

The arbitrage fund delivers returns similar to liquid funds. However arbitrage funds have an advantage of being taxed in line with equity funds. Hence due to the tax advantage arbitrage funds are preferred over the liquid funds.

Arbitrage funds are those funds that attempt to benefit from price anamolies between shares and future contracts of the underlying. The returns expected from the arbitrage fund are in the range of 6 per cent to 7 per cent per annum.

In the Union Budget of 2015, the government has increased long term capital gains tax to 20 percent from 10 per cent for all the mutual funds except equity funds. The long term tenure has been extended from 1 year to 3 years. Hence the popularity of arbitrage funds is on the rise.

Usually investors park their short term money in liquid funds or arbitrage funds. The tenure usually is 15 days to 6 months for such investments.