What are arbitrage funds in India?
Arbitrage Funds fall under the hybrid mutual fund category. These funds are distinct in their investment approach and aim to generate returns from the price disparities of the same asset in different markets, mainly the cash and futures markets.
The term "arbitrage" refers to the process of buying an asset in one market while simultaneously selling it in another, exploiting the price difference to yield a profit. In the context of arbitrage funds, this involves taking advantage of price discrepancies between the cash and futures markets of stocks or other eligible securities.
How do arbitrage mutual funds work?
Arbitrage funds exploit the pricing disparity of securities across markets. These price differences can occur due to various factors such as supply-demand imbalances, market inefficiencies, or differences in trading volumes.
Cash market
In the cash market, arbitrage funds buy stocks or securities at the prevailing market prices. These assets are typically selected based on their liquidity and the arbitrage opportunities they offer.
Futures market
Simultaneously, arbitrage funds sell equivalent positions in the futures market. Futures contracts are essentially agreements to buy or sell an asset at a predetermined future date and price. By selling futures contracts, the fund locks in a future selling price for the assets they hold in the cash market.
Features of arbitrage funds
Potentially stable returns
The ability to generate potential returns, regardless of the market's overall movement, appeals to many investors seeking stability and security.
Relatively stable
Their relatively low-risk nature provides a certain level of comfort during periods of heightened market volatility.
Hedged positions
Unlike other investment options that can be adversely affected by sharp market downturns, arbitrage funds tend to maintain their value due to their hedged positions.
Factors to consider before investing in arbitrage mutual funds in India
Investment objective: Clarify your investment objectives, whether they are capital preservation, moderate growth, or tax efficiency.
Risk tolerance: While arbitrage funds are generally considered low risk, they are not entirely risk-free. Understand your risk tolerance and ensure it matches the fund's risk profile.
Tax implications: Be aware of the tax implications associated with these funds, especially the tax treatment of gains if held for a certain duration. Consult with a tax advisor if needed.
Fund selection: Choose a fund with a consistent track record, expert fund managers, and a low expense ratio. Research various funds to find the one that aligns with your objectives.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.