Zerodha Fund House has launched the Zerodha Arbitrage Fund, giving investors another option to deploy surplus cash for relatively short periods while seeking lower volatility than traditional equity funds.
The new fund offer is an open-ended equity scheme that will primarily target arbitrage opportunities across the cash and derivatives markets. The minimum investment is Rs 5,000.
Unlike conventional equity funds, the scheme does not depend mainly on stock prices rising. Instead, it aims to benefit from temporary price differences between the cash and futures markets.
For example, if a stock trades at a lower price in the cash market while its futures contract trades at a higher price, the fund can buy the stock and simultaneously sell the futures contract. The price difference, after applicable costs, can become the potential return when the two prices converge.
Zerodha Fund House said the scheme will invest at least 65% of its portfolio in equity and equity-related instruments, including derivatives. When suitable arbitrage opportunities are limited, the fund can invest part of its portfolio in short-term debt instruments according to its investment strategy.
This approach can reduce exposure to broad market movements compared with conventional equity funds. However, arbitrage funds are not risk-free. Returns depend on the availability of opportunities, market conditions, transaction costs and the performance of the debt component.
Also Read: Why Data Centres Are Now A Sovereignty Bet, Not A Real Estate One - Nikhil Kamath's Take
How are arbitrage funds taxed?
Arbitrage funds are generally taxed like equity-oriented mutual funds because they maintain the required equity exposure.
Units sold within 12 months attract 20% short-term capital gains tax. For holdings beyond 12 months, gains qualify as long-term capital gains, with gains above Rs 1.25 lakh in a financial year taxed at 12.5%.
This tax treatment can make arbitrage funds worth comparing with other short-term investment options, particularly for investors in higher tax brackets. However, investors should consider their investment horizon, liquidity needs, expected returns, exit load and associated costs before investing.
Zerodha Fund House is a joint venture between Zerodha and smallcase. The fund house currently offers index funds, ETFs and fund-of-funds across asset classes and says it serves more than 12.5 lakh investors.
ALSO READ: Don't Blame CAS: Nithin Kamath Flags High STT, Limited Shorting For Recent Closing Swings
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.