There was a person named Vikrant. He owned a garment shop in a small city. He used to make his bulk purchase from Mumbai at lower costs and resell it in his city at relatively higher cost. For example, if a regular T-shirt would cost him Rs. 300/- then, he would sell it at a rate not less than Rs. 600/-. Hence making a double profit. This is called arbitrage opportunity. Taking the advantage of the difference in the prices of two markets is the strategy followed by many business firms. However, it lasts for a short-term.
Arbitrage Mutual Fund is a unique scheme of the mutual fund industry. Unique because the investment and disinvestment take place simultaneously. In simple terms, the Arbitrage Mutual Fund deals in two different markets viz, the stock market and derivative market. In the stock market, the dealings are done in cash. The derivative market also called as futures market is a place where the dealings are done on the contractual basis, and no cash is involved. Hence, you buy in cash, but your sell is not in cash.
Initially, for some time, Vikrant got a huge success and was able to earn profits that kept on rising. But, as people knew the secret of his business it became difficult for him to continue with the same strategy. He had to either bring down his profit margin or had to lose its customers to the competitors. Thus, zeroing the scope of further profits.
In the same way, the profits from arbitrage fund are also short-lived, and as more and more investors start investing, the gain narrows down. Hence, it is suitable only for short term investing. People tend to believe that Arbitrage MF performs ably in the bullish and bearish market. But, they are mistaken here. When the market is bullish, then it is a clear fact that the price of shares in the futures market will be more. And in contrast to this, when the market follows a bearish trend then the price of shares in the stock market will be more than that of the derivative market. Hence, the clients can make a profit only when the markets follow an upward trend.
There is another variant of Arbitrage Mutual Fund known as the Arbitrage Plus Fund. Practically there is a thin line separating both the funds. In Arbitrage Plus Fund there is a portion of shares that are not sold in the derivative market. Both funds are embedded in one single scheme because of the minute difference in their working.
Attributes of Arbitrage Mutual Fund
From the viewpoint of a client the Arbitrage Mutual Fund is the best fund due to the following reasons:
Therefore, Arbitrage Fund gives an OK signal to the clients who aspire for capital appreciation through equity investment that too for short-term. The clients will undoubtedly earn higher profits with much lower risks involved.
Arbitrage Mutual Fund is a unique scheme of the mutual fund industry. Unique because the investment and disinvestment take place simultaneously. In simple terms, the Arbitrage Mutual Fund deals in two different markets viz, the stock market and derivative market. In the stock market, the dealings are done in cash. The derivative market also called as futures market is a place where the dealings are done on the contractual basis, and no cash is involved. Hence, you buy in cash, but your sell is not in cash.
Initially, for some time, Vikrant got a huge success and was able to earn profits that kept on rising. But, as people knew the secret of his business it became difficult for him to continue with the same strategy. He had to either bring down his profit margin or had to lose its customers to the competitors. Thus, zeroing the scope of further profits.
In the same way, the profits from arbitrage fund are also short-lived, and as more and more investors start investing, the gain narrows down. Hence, it is suitable only for short term investing. People tend to believe that Arbitrage MF performs ably in the bullish and bearish market. But, they are mistaken here. When the market is bullish, then it is a clear fact that the price of shares in the futures market will be more. And in contrast to this, when the market follows a bearish trend then the price of shares in the stock market will be more than that of the derivative market. Hence, the clients can make a profit only when the markets follow an upward trend.
There is another variant of Arbitrage Mutual Fund known as the Arbitrage Plus Fund. Practically there is a thin line separating both the funds. In Arbitrage Plus Fund there is a portion of shares that are not sold in the derivative market. Both funds are embedded in one single scheme because of the minute difference in their working.
Attributes of Arbitrage Mutual Fund
From the viewpoint of a client the Arbitrage Mutual Fund is the best fund due to the following reasons:
- It is a risk averse scheme because the buying and selling of the stock are done simultaneously. Thus, the risk of market fluctuations is negligible. For example, the share of a company is priced at Rs. 50 on the stock exchange and Rs. 52 in the derivative market. If the fund manager buys from the stock market and sells in the futures market at this moment making a profit of Rs. 2 on each stock.
- Also, to capital gains clients are able to get a scheme which is tax-efficient. In other equity-oriented schemes, the capital gains are taxable according to the tax slab of the client. But, the profit from Arbitrage fund is taxed at the rate of 15%.
- A notable return percentage of 9% is obtained by the clients. Hence, making it more suitable than debt funds. At the same time, it is less risky than other equity-oriented funds.
- The Arbitrage mutual fund can make a profit only when there is a price differential in the market. As soon as the market at equipoise, the arbitrage opportunities die out. But, practically it is not possible for the stock and futures market to strike equilibrium.
Therefore, Arbitrage Fund gives an OK signal to the clients who aspire for capital appreciation through equity investment that too for short-term. The clients will undoubtedly earn higher profits with much lower risks involved.
No comments:
Post a Comment