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Where to invest in the stock market fluctuations?

Where to invest in the stock market fluctuations?

Where to invest in the stock market fluctuations?
These days, there is a lot of volatility in the stock market. But even in this phase of fluctuations, investors need not panic. Because there is an option of investment in the market where volatility is used to generate returns. This option is an arbitrage fund. Let's talk about this fund-

What is the arbitrage fund?

Arbitrage funds can be a better investment option for investors with low risk in times of market volatility. They fall under the category of equity mutual funds. This means at least 65 per cent of the investment is in equity. While the rest is invested in debt and money market instruments. Arbitrage funds generate returns by taking advantage of a stock price difference in the cash and future(derivatives) segment of the equity market. The price gap between the two segments widens in the volatile times in the stock market. When the volatility in the market increases, these funds give higher returns, but when the market volatility decreases, the returns also decreases.
What is arbitrage fund?

How does it work?

In this, shares are bought at a lower price from one segment and sold at a higher price in the other segment. This can be understood with the help of an example- Suppose a share of a company is priced at Rs 500 in the cash segment and Rs 550 in the future/derivatives segment. Therefore, if an investor buys this stock in the cash segment and sells it in the future segment, then he will get a profit of 50 rupees. In this way, arbitrage funds take advantage of the difference between the prices in the cash segment and the future segment.


What are the tax provisions?

These funds fall under the category of equity mutual funds. Therefore, tax on it also looks like equity.

Growth options: If you redeem within less than one year, the income will be treated as short term capital gains and you will have to pay 15% (plus 4% cess) short term capital gains tax. But if you redeem after one year, the income will be treated as long term capital gains and you will have to pay 10%(plus 4% cess) long term capital gains tax on income above Rs 1 lakh annually. 

Dividend option: The investors do not have to pay tax on the dividend received, but the fund house deducts the investor's 10% of the dividend distribution tax i.e. DDT (plus 4% cess and 12% surcharge plus 11.648% of the total) on the dividend. 

What are the tax provisions?


Advice: Growth or Dividend?

Those who have been investing in it for a year can opt for the dividend option because  if the  holding period is less than one year, you will have to pay 15% short term capital gains tax in the growth scheme, whereas in the dividend option, fund house pays an investor-only 10% of the dividend distribution tax on the dividend. At the same time, for those whose holding period is more than one year, the growth option will be good.


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