Invest in arbitrage mutual funds to benefit from market volatility

Some mutual fund advisors believe that arbitrage funds are likely to benefit from the current volatility in the stock market. “Investors can make use of the current volatility in the market and generate returns by investing in arbitrage funds,” says Vivekh Pathak, a Certified Investment Planner based in Delhi. “We are recommending arbitrage funds to investors who want to take advantage of the current market volatility. Debt investors can bet on these funds for better post-tax returns,” adds Pathak.

Arbitrage funds look to exploit the price differences in stocks between the cash and future market. They are recommended to conservative investors looking to park money in the short to medium term and get better post-tax returns. Arbitrage funds are treated like equity funds for the purpose of taxation, and it gives them an advantage over debt funds. Short-term capital gains in arbitrage funds are taxed at 15 per cent and long-term capital gains are tax-free.

Arbitrage funds have offered 7.48 per cent returns in the last five years, 7.07 per cent in three years and 6.16 per cent in the last one year.


“Arbitrage funds are a good option if you have a short investment horizon and if you want to play on the market volatility. For investors who are risk-averse, arbitrage can be a good bet at this time,” says Puneet Oberoi, Founder, Excellent Investment Advisors. “Arbitrage funds are tax-efficient and are a good bet for investors who want better returns than debt funds. These funds are also less risky, which makes them a good option for many debt investors,” adds Oberoi.

Vivekh Pathak is anticipating more volatility in the market in the coming days as he believes that the current valuations are very high at this point and a deeper correction is likely.

However, experts suggest that investors shouldn’t expect very high returns from the category. “Arbitrage funds can give you a little more than debt funds or liquid funds. Don’t expect them to provide you equity like returns,” says Neeraj Chauhan, CEO, The Financial Mall.

“If you have money to invest and you can’t invest it for a long duration, this is a good time to earn extra returns in arbitrage funds,” says Puneet Oberoi.