How to select a suitable arbitrage fund for investment?

Arbitrage funds have become a popular option for investors seeking low-risk investments that provide relative stability to their portfolio along with a reasonable return potential. These funds which fall into the hybrid funds category aim to benefit from the price differences between the cash and futures market for underlying stocks. With numerous arbitrage funds available, selecting a suitable one can be challenging. This article provides a comprehensive guide on how to select arbitrage fund for investment.

• Table of contents

1. Factors to consider when selecting an arbitrage fund
2. Researching and evaluating Arbitrage Funds
3. Making the final choice

Factors to consider when selecting an arbitrage fund

There are several key factors an investor must evaluate when shortlisting arbitrage funds. Careful assessment of these factors is important to ultimately pick an appropriate fund.

Fund management experience: The credentials of fund managers are critical as arbitrage strategy implementation depends a lot on their experience and skills. Funds managed by experienced managers, who have successfully navigated multiple market cycles, should be prioritised. One can check details like past designations, years of arbitrage experience, other schemes managed etc. on the AMFI and fund house websites.

Fund expenses: Ongoing charges like total expense ratio and exit loads can significantly slash returns over the long run. Arbitrage funds aim to deliver steady returns, so it is prudent to prefer low-cost options with a less expense ratio. Exit loads, if any, should be minimal.

Researching and evaluating arbitrage funds

To select the most suitable fund efficiently, investors must diligently research and analyse various offerings available.

Online fund research: Comprehensive fund details are available on AMC websites via factsheets, portfolio disclosures, annual reports, and videos. Investors must scrutinise these for each shortlisted fund over time.

Monthly/quarterly factsheets: Regular factsheets provide insights into strategy, cash levels, portfolio turnover, sector & stock concentration. Analysing changes quarter-on-quarter reveals consistency.

Making the final choice

After extensive due diligence, based on individual circumspect evaluation of all collected research data and insights, investors must prudently select an arbitrage fund according to their priorities. Some ideas are mentioned below.

• Pick the fund with the most consistent long term returns track record across market cycles.
• Ensure the selected fund matches cost parameters, size limits and portfolio composition preferences.
• Give preference to funds managed by experienced leaders in the category over longer periods.
• Keep a watchful eye on relative performance versus peers and rebalance proactively. Using a Compounding Calculator can help investors visualize how their investment in an arbitrage fund could grow over time. The calculator can project how compounding could enhance overall returns by entering the principal amount, expected return rate, and investment duration.If you're considering an SIP investment, you can similarly use a mutual fund SIP calculator for help with planning.

Conclusion

Methodical research and astute selection based on quantitative and qualitative merits are crucial for identifying the optimal arbitrage fund. Regular reviews also ensure the chosen investment continues delivering as per expectations over the investment horizon. Bajaj Finserv Arbitrage Fund could be a suitable option for investors looking for an arbitrage fund based on the criteria discussed in the article on how to select a suitable and appropriate arbitrage fund. For a detailed scheme information, click here. The fund offers adequate diversification across a good number of stocks and its total expense ratio makes it a low-cost option as well.

FAQs:

What is the difference between an arbitrage fund and other types of mutual funds?

Arbitrage funds profit from temporary price differences between similar financial instruments, rather than focusing on long-term gains like other equity or bond funds. They seek to remain market-neutral through short-term trades that exploit pricing inefficiencies, unlike other funds whose returns rise and fall with broader market movements.

How do arbitrage funds generate returns?

Arbitrage funds generate returns by taking advantage of price differences between financial markets or products. They do this by simultaneously buying a security in one market and selling it in another, pocketing the price difference after transaction costs. Once the price differences converge, they close out the position to realise a riskless profit from temporary market inefficiencies.

Are arbitrage funds suitable for conservative investors?

While arbitrage funds seek to gain from temporary price differentials, there are risks like market volatility that conservative investors seek to avoid. However, many arbitrage funds do maintain a low-risk profile through hedging strategies and focused areas like merger arbitrage. Overall suitability would depend on an individual investor's specific goals, risk tolerance, and time horizon.

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.