What are Mutual funds? How Mutual funds work?

Q: What are Mutual Funds?

Ans: Mutual fund is an investment house where the money is collected from investors, which is then invested in different types of funds by the fund managers. These funds are then invested by the money managers in different funds which in turn will give the investors profit on their invested money. (mutual funds are subjected to market risks read all scheme related documents carefully :-P)

There are three types of mutual funds:

Open Ended Scheme - In this scheme, the investor can buy and sell the units anytime and according to his own wishes.

Close Ended Scheme - In this scheme, the investor can only invest during a certain period of time. The units can be bought and sold only for a certain period of time. The number of buyers in the market for the funds in this scheme is very less.

Q: What are the different types of mutual funds?

Ans: Mainly there are three types of mutual funds :

1.Equity mutual fund.

2.Debt mutual fund.

3.Hybrid mutual fund.

Q: What is Equity mutual fund?

Ans: Equity mutual funds are directly invested in the stock market. They can be classified as follows:

Large Cap Fund - These funds are invested in big companies which are well established and have good growth in their sector. They have good wealth reserve during bad times to stabilize themselves from losses. Since these companies like Reliance Industries, L&T Co, TCS, etc have stable performance and are on top these funds are low risk and fewer return funds.

Mid & Small Cap Fund - The funds which are invested moderately succeeded or recently established companies which can go in a loss any moment are called as mid&small cap fund. This company comes with high risk and high return margins.

Sector Fund - These funds are invested in a particular company or industry. For example, Aditya Birla SL Infrastructure fund is a type of sector funds which invest in infrastructure companies.

Dividend Yield Fund - These funds are invested in big companies which are stable, less volatile and showing good profits. These funds are invested in the above-mentioned companies which will give a dividend to their investors regularly even though it is not necessary for the company.

Equity Linked Savings Scheme(ELSS) - The funds invested in this scheme are locked for a period of a minimum of three years. These funds are mainly tax saver funds. Under the rule of section 80 C, you can get tax benefits up to Rs. 1.5 lakhs.

Diversified Equity Fund - These funds are invested into different sector funds or large, small and mid-cap funds.

Thematic Fund - These funds are invested in a particular theme such as E-Commerce theme, Banking theme, etc.

Q: What are debt mutual funds?

Ans: In debt mutual funds companies or government take money from the investors and return it with interest to the investors. These funds are of low risk and low return funds. They can be classified into four different types:

Junk Bond Schemes - This scheme is highly volatile. The money invested in this scheme comes with high risks and high returns.

Liquid Schemes - These funds are taken by the companies for a shorter period of time. They are less risky and less volatile in nature. These are the best funds to invest for a shorter period of time. You can withdraw the amount anytime you wish to use the money.

Gilt Funds - These funds are invested in government securities, therefore, carry zero risks. Gilt Funds are of two types: Short term and Long term. Government security is a bond issued by a government authority with a promise of repayment upon maturity.

Fixed Maturity Plans - Fixed maturity plans are like bank FD with a pre-decided lock on the period of the funds. These funds are usually invested in government bonds, corporate schemes. Though it is similar to FD, its returns are higher than Bank FD.

Q: What are Hybrid funds?

Ans: Fund managers invest money in both Equity and Debt funds under this fund. They are of three types:

Balanced Fund - Though the name suggests balance the fund is divided in 80%-20% ratio. 80% of the amount is invested in equity and 20% in debts. This helps it to balance the returns and the risks of funds.

Arbitrage Fund - In this fund, 60-70% of the funds go in equity but here the amount invested is safe only the returns will differ from 5%-10%. Arbitrage funds come under the same taxation slab as equity funds.

Monthly Income Plan(MIP) - In this fund, the manager invests some parts of money in debt securities and some parts in Equities. Most of the money is invested in debt securities so the risk of this fund is less than an equity fund. Since some of the money is invested in equity this fund is not 100% risk-free.

How mutual funds work?

A mutual fund is an investment fund managed by Asset Management Company which collects all the money from the investors, invest it in different investment markets and distributes the profit/loss made on the investment to the investors.

     The mutual fund collects money from investors in two ways:

• SIP (Systematic Investment Plan)

• Lumpsum 

Asset Management Companies charge a small amount in the form of commission on the investment made. 13 benefits of investing in mutual fund.

#All this data is based on mutual funds past performance please be careful before you invest your hard earned money.

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What is expense ratio in Mutual Funds? | Complete guide

What is expense ratio in Mutual Funds?

Expense Ratio is the fees charged by the Asset Management Company (Mutual Fund House) to manage your investments. This expense ratio represents all the management fees and operating costs of the fund. It is charged every day by the AMC. NAV is published every day after the deduction of ratio fee from the investment.

                   

Mutual Fund expense ratio explained:

So you got to know what is expense ratio. Now let's see what are the basics and what affects it:

The ratio is calculated by taking into account the following expenses done by the AMC:

• Management fees- Mutual Fund is an actively managed fund. It means AMC has to employ fund manager and a group of the team which will continuously study the market and makes the investment. This ensures that your investment will gain maximum returns. It also helps the AMC to maintain its position and good performance among the competition.

• Advertising and Promotion expense- It's charged by AMC to promote the concept of mutual funds among the people and to promote themselves. 

• 12B-1 fee- It's the annual marketing or distribution fee on a mutual fund. It is between 0.25%-0.75%.

• Legal & Audit expense.

• Registrar and transfer agent expense- It is charged when you purchase a fund.

• Custodian fee- It is charged by the AMC for safe-keeping services. It is service offered by financial institutions to safeguard the assets of the clients, which reduces the risk of the client's assets security.

 AMC deducts their expense ratio while calculating NAV (Net Asset Value). What is nav in mutual fund? How to calculate?. NAV is the per unit price of an AMC's particular fund. It means when the value of NAV of a certain fund is calculated, it is inclusive of the expense ratio of the particular fund company. 

          Value of NAV is published everyday whenever the market is open for trade. These are because at the end of the trading day whatever loss or profit is made on the investment, on that basis per unit price is calculated again and the expense is also deducted from the investment for that particular day. 

         

          If you had bought a particular fund at Rs. 20 per unit price (NAV) and its current value is Rs. 30, so you got a return of 50%. This return is calculated after deducting expense ratio. 

         There are certain fees charged by AMC which are also included in the NAV like brokerage charges and other charges which are also deducted from NAV, but these fees are not included.  

         In the long term investment expense ratio matters a lot because of the compounding, it can affect your investment a lot. The ratio is not constant in the mutual fund. It keeps on changing depending on the AMC. 

        As a SEBI guideline, it's necessary for a fund company to announce any change in its ratio to the investors.

How to compare a particular fund expense ratio?

        Every fund has a different ratio. To check a particular funds ratio, you can compare it with the average ratio of that fund in the market. Lets consider an XYZ large-cap fund is charging an expense ratio more than the average ratio of large-cap mutual fund schemes in the market and the fund is giving very good returns and risk factor is less than the competitors, than the high ratio is ok but if the performance of the fund is very poor then you should be careful while investing in that fund.

        It's not necessary that a fund with a low ratio is a good fund. You should consider the performance of the fund, fund manager expertise, risk factor of the fund 

        No AMC can charge more than 2.5% for equity and 2.25% for debt mutual fund.

Difference between expense ratio of direct fund vs regular fund:

The direct fund has a lower ratio since no intermediary is involved while in regular fund expense ratio is more as a part of its spend on the distributor for that advice.

Good performing Mutual Fund with the lowest expense ratio list (18 March 2019):

Equity (ELSS)-

mirae asset tax saver fund direct plan                Return- 24.36%      Ratio- 0.80.

motilal oswal long term equity fund direct plan   Return- 20.00%      Ratio- 0.74.

tata india tax savings fund direct plan                 Return- 17.98%      Ratio- 0.99.

Large-cap fund-

hdfc index fund sensex plan direct plan              Return- 16.92%      Ratio- 0.10.

uti nifty index fund direct plan                             Return- 16.47%       Ratio- 0.10.

hdfc index fund nifty 50 plan direct plan              Return- 16.46%      Ratio- 0.10.

Mid Cap fund-

L&T midcap fund direct plan                               Return- 18.98%      Ratio- 0.93.

axis midcap fund direct plan                               Return- 18.72%      Ratio- 0.98.

invesco india mid cap fund direct plan                Return- 18.21%      Ratio- 1.00.

Small Cap fund-

hdfc small cap fund direct plan                            Return- 23.48%      Ratio- 0.87.

L&T emerging businesses fund direct plan         Return- 22.97%      Ratio- 0.85.

aditya birla sun life small cap fund direct plan     Return- 16.44%      Ratio- 1.07.

Mutual Fund expense ratio India:

By the SEBI Regulation Act 1996, Mutual Funds are allowed to charge operating fees for managing the mutual fund scheme. All expenses incurred by a Mutual Fund AMC will have to be managed within the limits specified under Regulation 52 of SEBI Mutual Fund Regulations. 

             For actively managed equity schemes, the total ratio (TER) allowed under the regulations is 2.5 % for the first ₹100 crore of average weekly net assets; 2.25 % for the next ₹300 crore, 2 % for the subsequent ₹300 crore and 1.75 % for the balance AUM. For debt schemes, the ratio permitted is 0.25 % lower than that allowed for equity funds. 

Mutual Fund expense ratio calculation:

Expense Ratio is deducted from the NAV every day. Let's take an example if the ratio of the mutual fund is 1% and you invested Rs. 1,00,000. The ratio is charged 1% annually that means one-day the ratio charged is 1% / 365. 

         So next day if your investment becomes 1,00,200 then your ratio deducted for that day will be 1% / 365 x 1,00,200 = Rs 2.74. If the investment becomes Rs. 1,01,000. then the  ratio deducted will be 1% / 365 x 1,01,000 = Rs 2.76. In this way, everyday expense ratio will be deducted from your investment.

ETF vs Mutual Fund expense ratio:

ETF has a less expense ratio compared to Mutual fund since ETF is a passively managed fund. Mutual Fund is an actively managed fund which has many hidden costs to support the ecosystem, this pushes the expense ratio higher. What is etf? Complete guide to etf.

Zero expense ratio mutual fund:

Fidelity has announced zero expense ratio mutual funds for investors. It will be known as Zero Index Fidelity Funds. 

#All this data is based on mutual funds past performance please be careful before you invest your hard earned money.

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What is an ETF?| Complete guide to ETF investment

Definition of exchange-traded funds(ETF) /what is an ETF?

Exchange-traded funds mean doing trade on cash market like Nifty, Sensex, Bank Nifty and other indices through a demat account. It is a fund which replicates a market and passively managed fund by asset management companies. We can't directly buy Indices like Nifty, Sensex, Bank Nifty, etc. ETF allows us to invest in the indices by replicating its performance. ETF can be bought like stocks from the trading markets.

What is ETF Investment in India?

ETF has not established much in India because of the developing nation tag. ETF performs much well in developed countries because the market there is developed and the indices show a steady performance. Indian markets are affected by very small factors or we can say it is a very reactive market which can go up or down anytime.

        Let's consider we want to trade on Nifty today so, nifty consists of top performing 50 companies which gives consistent returns over the year and each company has a particular percentage of share or presence in Nifty. 

        Let's say HDFC holds 9% share, Reliance holds 8% share, ITC holds 6% share, other 77% shares are held by 47 remaining companies. So when we invest in nifty through ETF, the fund manager will buy the stocks of the 50 companies according to their percentage of share. 

        If you are going to invest Rs. 1 lakh, so the fund manager will buy stocks of HDFC worth Rs.9000, Reliance stocks worth Rs.8000, ITC stocks worth Rs.6000 and the stocks of remaining 47 companies. 

The expense ratio of the ETF:

The expense ratio of ETF is 0.05% to 1% on the investment as of 09 DEC 2018. The ETF expense ratio is very less since the fund is passively managed by the fund house and you don't have to pay much for their manual investment labor. 

Advantages and disadvantages of ETF:

Advantages:

• Fewer management fees- Since ETF is passively managed by fund companies you don't have to pay high fees. It has less expense ratio than mutual funds. You only have to pay brokerage charges for a particular transaction. But if the number of transactions you do is high then it will have a heavy effect on your brokerage.

• Less risk- If you have knowledge about what you are doing, investing in indices has less risk because the indices mostly consist of consistent performing companies giving a constant return on your investments.

• Instant diversification- Since the investment is done in different sectors of companies, your investment is diversified decreasing your capital risk and chances of maximized profit are high.

• Government securities- As an individual person, you can't buy government securities like stocks from a market. But ETF acts as a medium for you to invest directly in such government securities.

• Buying/Selling- In mutual funds you can't buy or sell your units on a particular day. It almost takes more than 24 hours to withdraw your funds. In ETF you can buy or sell units multiple times in a day.

• Options- Since there are fewer options for you to invest, you can keep track of the performance of different indices you want to invest. This makes it easy for an investor to select the investment option he wants to make. 

Disadvantages:

• Less return- Some of the actively managed funds beats the returns than most of the indices because of these ETF gives less return compared to the actively managed funds.

• Brokerage charges- If you have a number of transactions in ETF then the cost of the brokerage charges can be more than the fees charged by the actively managed funds.

• Less popularity- Since the popularity of ETF is less in India some of the funds are held for a longer period of time decreasing the liquidity ratio. But as more people will come to know about ETF, the liquidity ratio will increase.

• Fewer options- Compared to the developed countries ETF in India has fewer options for investment.

Should we invest in ETF?

It is a very good option to invest in ETF if you have good knowledge about what you are doing. Since you are investing in the indices chances of profit are high. Less expense ratio which profits you in the long run. Diversified investment in consistent return giving companies. You can buy and sell your investment anytime. Since it's passively managed you benefit from some guidance.

Types of ETF:

• Equity- ICICI Prudential Nifty ETF(Nifty 50) | Kotak Banking ETF (Nifty Bank Index)

• Bond/Debt- LIC Nomura Long Term ETF

• Gold- Axis Gold ETF | Kotak Gold ETF

• Global Indices- Reliance ETF Hang Seng

Do ETF pay dividends?

ETF pays the investors full dividend that comes from the stocks. Most of the ETF pay the investors the dividend earned from the profit of the investment on a quarterly basis.

Is ETF safe?

If you have knowledge about the share market, how it performs then you can earn some nice profit from ETF. You should have knowledge about how and when to invest in indices. If you invest at the right time you will be making a huge profit on your investment. Since the movement of indices is less compared to a particular stock in the trading market you have a chance to limit your loss.

Can we reinvest the dividend in ETF?

Yes, you can reinvest the dividend but to do it is a complicated process, but you can do it manually by buying more units in ETF using the dividend you received.

How much tax we have to pay on ETF returns?

If you are holding the indices fund for less than a year than you have to pay short term capital gain tax of 15% on your profit. If you are holding the fund for more than a year than you have to pay no tax on your profit.

What is the difference between Mutual Fund and ETF?

1. Mutual Funds set price daily vs ETF trade all day.
2. In Mutual Funds, you can trade only once with your total investment vs an ETF you can sell and buy all day.
3. Mutual funds are actively managed by the fund house buying and selling to maximize your investment vs In ETF you are investing on a particular indices fund.
4. Mutual funds are bought through fund companies, broker or financial advisors vs ETF can be bought through Exchange.
5. Your investment in Mutual funds is managed by experienced people who study the market continuously so you don't have to worry about your investment vs In ETF you are more responsible for your investment.
6. In Mutual Fund you have to pay more because the expense ratio is more vs In ETF you are managing your own investment so you have to pay less.

Which is a better ETF or Mutual Fund?

Both has its own pros and cons. ETF gives you more flexibility in your investment. The Mutual fund is managed by professionals decreasing your risk factor. Diversified investment is possible in ETF. The responsibility of your Investment is high in ETF. It depends on how good you are in trading and your understanding of the market. The time factor is also crucial here. Do you have time to follow the performance of the market?

Is ETF better than stocks?

In stocks, you are buying a particular share of a company. Most of the investments done in stock are less diversified compared to indices investment. In ETF entire performance of indices affect your investment but in stock, a particular company can affect your investment. In stocks, you can make a huge profit margin by investing in a single successful company but indices is a slow-moving steady pace market, so will be your investment.  

Index fund vs ETF fund:

• You don't need a demat account to trade in an index fund. You have to buy from the fund house.

• You can do fraction trading in an index fund but in ETF you have to do the whole trading.

• You can buy or sell In ETF during the trading hours but in an Index fund, you have to buy units after the trading hours are done at the end of the day.  

What is a gold ETF? 

It is a commodity trading in which you can only buy and sell gold. It can be bought and sold only on stock exchanges thus investors don't have to worry about keeping physical gold.

Where can I buy the ETF?

You can buy ETF through your broker by placing order either online platform or through telephonic mode. It is similar to buying stocks online. You have to open a demat account with a stock exchange registered broker. 

  #All this data is based on mutual funds past performance please be careful before you invest your hard earned money.

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Definition of Mutual Fund? | Top 13 Benefits of investing

Definition and meaning of mutual fund:

        A Mutual fund is a type of investment provided by a middle-man company between investors and investment markets. The company invests in stocks, bonds, money market and other assets on the behalf of people to maximize their investment under the guidance of a successful fund manager and his team. 
              People who don't have knowledge about the financial markets and don't want to invest their time in studying the market give this money to the fund company which invests in the market and ensures profit on the investment. For eg. fund companies like the HDFC mutual fund, reliance mutual fund, etc.

Benefits of investing in mutual funds India:

• Risk Diversification- In a mutual fund, your investment is done in different investment markets like stocks, bonds, etc. Unlike the stock market, if any of the markets fail still you can average it out with other investments. So the risk factor is less compared to the stock market.

• Professional managers- The mutual fund companies appoint the best of the talents who have researched the market for years. They know how the market works and can maximize the profit and minimize the loss. These people take care of your funds so that you don't have to worry about your investments.

• Profit on investment- If you are investing in the mutual fund for a longer period you can make a huge profit on your investments. Most of the funds can give you returns in the range of 10%-25%( for some funds it can be more or less than the given figure). Investing in a good mutual fund company can ensure a better return on your investment.

• Nominal charges- Mutual fund companies charge you very less compared to the returns they are giving. You will be charged very less or nominal for all the management of your funds. 

• Tax benefits- You can enjoy tax benefits on some of the funds like ELSS or Equity Linked Savings Scheme. I have written more about it What is ELSS fund?.  Under section 80C returns of up to 1.5 lacs will not be taxed by the government. With a lock-in period of three years and a return of 12-14% its quite a good option for sip investment.

• SIP- It's just like recurring deposit but you will get much more returns compared to Bank FDs. You have the flexibility of choosing the amount you are going to invest every month. SIP gives less return compared to the lump sum.

• Lump sum- In lump sum you are going to invest a certain amount for a longer period. The interest you will be getting keeps on compounding making more profit in a shorter period. I have discussed more sip and lumpsum here Which is better SIP or Lumpsum?.

• No lock-in period- Most mutual funds don't have a lock-in period. You can withdraw it online in 2-3 days without much paperwork. You can withdraw the fund prematurely from locked-in mutual funds without losing your interest, unlike the bank FDs which cause you a lower rate of interest. Though you will be charged a penalty for doing so. Its always good to do some research before investing in mutual funds.

• Safety of your investment- You should know that there are investment options in mutual funds like bank FDs which has lower risk and give a higher return. Debt funds are one of them. Debt fund gives a better return in a shorter period. One more benefit is that if you hold your fund for more than three years you will be taxed less than the bank FDs. Know the basics and investment options in debt funds What are debt mutual funds?.

• SEBI- All your investments are safe thanks to Securities Exchange Board Of India. You can rely on mutual fund companies registered under them. There is a transparency in the performance of mutual funds and you will get to know the performance of your funds and the current valuation of your investment. Read more about SEBI Functions of SEBI.

• Investment varieties- Unlike bank FDs, you can invest in different performing funds and investment markets to get more returns on your investment. You can change from one fund to another without many formalities.

•  Retirement options- If you start investing in mutual funds SIP at a younger age you will be getting a lot of return on your retirement. All this possible on a meager investment of Rs.100 per month. Of all the investment options like PFs, Insurance it can be one of the best performing investment.

• Risk factor- Mutual fund has a risk factor since the investment is done in a volatile market. But the investment is under the constant guidance of professionals and investment is done in a variety of investment markets, the damage to the investment is decreased by a huge amount. 

#All this data is based on mutual funds past performance please be careful before you invest your hard earned money.

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What is Debt Mutual Fund? Benefits of Investing

Q: What is a Debt mutual fund?

Ans: Debt means loan. Yes, so u guessed it right, in Debt mutual funds the fund manager gives your invested money to Government, businesses and financial houses. So why do they take money from mutual funds and what is the guarantee given in return? The government takes the money to meet the expense of developing the nation when the taxpayer's money is not enough to pay the bill.

      Mutual funds give money to the government in two types:

Treasury bills- This bills are auctioned by RBI at a regular interval. Treasury bills are the safe mode for the mutual fund's house to keep the surplus money. The risk value is less and the government offers a discount on face value. It has a loan period of less than one year.

Bonds- It is a security issued by a company, government or financial institutions which gives a regular or fixed payment of interest in return for borrowed money for a certain period of time. 

      ---Businesses takes money from Mutual funds in two types:

Corporate Bonds- It is a debt security issued by the corporates to the investors. The money taken will be returned depending on the future operations of the company. Companies physical assets can also be used as collateral for bonds. 

Commercial papers- It is a type of unsecured debt-type instrument issued while taking money from the investors. The maturity period of this bond is not more than nine months.

 

       --- Financial Institutions takes money from Mutual funds in two types:

Certificate of Deposit- It is a certificate of fixed deposit with specified maturity and fixed interest rate. 

Perpetual Bonds- It is a bond with no maturity date and the principal amount is never repaid, only the interest on the principal amount is paid to the investors.

Benefits of Debt Mutual Funds: 

Investors money is diversified- The money that you invest in debt mutual funds are invested in a different sector of debt funds, which decreases the risk of loss of the investor's money. Minimum Rs.500 can be invested in debt funds.

Your investment is handled by professionals- Every fund house has a fund manager with a team of professionals who studies the market continuously. This ensures the safety of your investments. 

Tax benefits- If you withdraw your investment before three years then you have to pay the taxation amount on your investment according to your tax slab. If you withdraw the investment after three years then you have to pay a tax of 20%, but due to indexation, your effective tax will be much less. (Indexation is a technique which adjusts the tax amount according to the inflation).

Well regulated investment house- All the mutual fund's house are registered under the SEBI and regulated under strict norms. Everyday NAV values are sent to the investors to maintain transparency in the industry.

Liquidity- In the open-ended scheme, you can sell a particular portion or all the assets based on your needs. But in a close-ended scheme, it's hard to sell it again in the market.

Types of debt funds:

1 to 90 days- For this time period, you can invest in liquid and money market funds. they give better or equal to the savings account. They are invested in government securities which comes with a maturity period of three months. 

3 to 6 months- For this time period, you can invest in ultra short term funds. They invest money in treasury bills and commercial papers. 

6 to 12 months- For this time period, you can invest in short term funds. In the short term, the money is invested in commercial papers, commercial deposits and corporate bonds.

1 to 3 years- You can invest your money in medium-term funds. They invest the money in commercial papers, commercial deposits, corporate bonds, and debentures.

More than 3 years-You can invest in long term funds. They invest the money in Corporate bonds, Government securities, and debentures.

#All this data is based on mutual funds past performance please be careful before you invest your hard earned money.

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What is Liquid fund?|returns higher than bank FD

What is a liquid fund?

It is a category of mutual fund which invests in different sectors like the certificate of deposits, treasury bills, commercial papers, and term deposits. Low maturity periods of these funds lead to no lock-in period for investors money. Liquid funds are a good alternative to the savings fund account since the returns are higher compared to the inflation ratio. Liquid funds have no lock-in period and the funds are processed within 24 hours. Liquid funds have the lowest risk because they are invested in fixed security scheme.

      Though the liquid funds don't give a higher return compared to other equity funds, it is better than the savings account. The return rate of liquid funds is higher than the interest rate of many savings bank accounts. Before investing in liquid funds always remember to check the fund house. Liquid funds come with different plans like growth plan, daily dividend plan, weekly dividend plan, and monthly dividend plan.

TAXATION

If you withdraw the liquid fund before a year you will be taxed to the same ratio of your income tax slab. But if you withdraw after a year you will have to pay tax according to long term gain tax of 11.33%(including surcharge and cess). So do a happy investment and earn smart returns.

To know about liquid mutual funds house returns click below:

• SBI Mutual Fund
• HDFC Mutual Fund
• Reliance Mutual Fund
• Axis Bank Mutual Fund

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What is Arbitrage Fund?|Short term High return| opportunities| taxation

Q: What is Arbitrage Fund?

Ans: Stocks are traded in different markets like NSE, BSE, Derivative market etc. Arbitrage fund means buying from one market and selling in another market. The difference in the price of the market will be its profit. BSE & NSE are cash market while futures depend upon the future price of the stock market. For example, if you buy a stock from NSE for Rs. 100 and its price in the futures market are Rs.110. So the profit from the fund will be Rs. 10. This change or profit is called an arbitrage opportunity. 

Arbitrage fund type(short term investment):

Arbitrage funds are a hybrid type of equity mutual funds in which debt investment is a very small ratio. Arbitrage funds make the profit from low risk buy and sell opportunities available in the market and the risk of the fund can be compared to debt funds. It is a good short term investment option.

Arbitrage Funds opportunities:

           Arbitrage opportunities can be seen when there is news about the stock market, quarterly or annual result of the companies, etc. Arbitrage funds give the best returns when the market is very volatile. Though arbitrage fund is a type of equity fund the risk is very low since the transaction takes place in different markets.

Taxation in Arbitrage Fund:

           Arbitrage funds are taxed like equity funds but returns are mostly equal to liquid funds. The arbitrage funds are invested in the short term(less than one year) and long term investment. The short terms investment is taxed 15% if the return is under 1 lakhs. In the long term, if in a financial year your returns are higher than 1 lakhs then you will be taxed 10% on your returns. 

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