The fund invests in arbitrage opportunities in the cash and the derivative segments of the equity markets. It aims to capture the spread (Cost of Carry) between the cash and futures market by simultaneously executing buy (in the cash market) and sell (in the futures market) trades.
The fund follows a strategy of taking market neutral (equally offsetting – because the stocks are bought and sold at the same time) positions in the equity market making it a low risk
product irrespective of the movements in equity market.
Buying in one market and selling in another simultaneously to take advantage of a temporary price differential is called arbitrage.
For instance, if you could buy A in Gujarat at Rs 100 and sell it in Mumbai simultaneously at Rs 101, you could make Re 1 profit at very low risk. This opportunity arises out of market inefficiency and is the basis of every arbitrage trade.
Advantage
Low risk vis-à-vis Equity Funds:
As the fund takes market neutral stance (hedges its equity exposure) and doesn't not take any directional calls, it is a low risk product versus pure equity funds
Benefit of Equity Taxation:
As per current taxation, IDFC Arbitrage Fund falls in the Equity Category (with 65% exposure towards equity) and therefore enjoys the benefit of no Dividend Distribution Tax and no tax incidence on long term capital gains (holding period is 12 months from date of investment)
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