So now that we know what arbitrage means how does it apply
to the stock market? In the stock market trades are done in cash or future and
the price in both these are different. In such a case, if the price in the
future market is higher than the cash price, one can purchase the stock in cash
today and deliver it in the future market at a higher price and make a profit.
That means if we invest in these funds you will never lose
your capital. Then why have arbitrage funds not caught up. One reason is, the
profit will take place only on a future date and if you want to exit in between
there could be a chance of loss. This chance of loss is what is holding people
back. But if you are ready to wait for some time, the returns are good, even
better that debt funds.
Arbitrage funds are good in a rising market, as the future
prices will most of the time be higher. So keep a watch on the cash and future
prices of around 10 stocks and if you see the average difference reducing, it’s
time to move out of the arbitrage fund.
The other advantage in arbitrage funds is taxation. Since
they are mostly equity funds and for equity funds there is no long term capital
gain. Even in case of short term capital gain, the tax is just 15% of the
capital gain. This is better than debt funds where short term capital gain is
taxable as per your tax slab.
So if you are looking at short term, arbitrage funds are
better than debt funds, but for long term, equity funds are the best.
