- Arbitrage funds are becoming profitable ventures with their peculiarity both in taxation and industry practice.
For people with short to medium-term financial goals, there is a need to talk about Taxation on Arbitrage Funds especially when an arbitrary investment may be a good option, as these funds can be used to park surplus funds to establish an emergency fund and earn higher returns on them.
Although harsh market conditions can cause temporary losses, arbitrage funds remain one of the most popular schemes in recent times.
It is important to state that, just like any other financial scheme, arbitrage funds are also liable to a tax deduction, and this article will be providing you with all the information regarding how it works.
What are Arbitrage Funds?
The word “arbitrary” literally means making a decision based on random choice or personal whim, rather than any reason or system.
These funds are a type of equity mutual fund that invests primarily in buying equity and equity-oriented funds.
Their risk level can be compared to that of a pure debt fund. Many arbitrage funds follow Crisil BSE 0.23% Liquid Fund Index as their benchmark.
In a more simpler terms, they take advantage of the price differences between current and future securities to get optimal returns.
How do Arbitrage Funds Work?
Arbitrage funds make profits from low-risk buy-and-sell opportunities in the cash and futures market.
The first step one needs to take is to get a smart and reliable fund manager who can manage one’s arbitrage and ensure great returns.
The fund manager purchases shares of a company in the cash market and sells them in the futures market while retaining a profit position, regardless of whether the stock price goes down or up.
Arbitrage funds charge a yearly fee known as the expense ratio, which is a percentage of the fund’s overall assets.
This fee includes the fund manager’s fee and fund management charges.
Taxation on Arbitrage Funds
It is important to know that the profit gotten from arbitrage funds is subjected to taxation, and is categorized as equity funds in this sense.
How it works is that, if one stays invested for less than one year, then one makes short-term capital gains (STCG) which are taxable at a rate of 15%.
On the other hand, If one holds the investment for more than one year, the returns are considered to be long-term capital gains LTCG, and are tax-free.
In conclusion, arbitrage funds have great advantages due to their low-risk nature and their taxation rules are pretty straightforward.
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