Arbitrage funds are a type of mutual fund that utilise the opportunity of the price difference between cash and futures segment of an asset. An arbitrage fund is like an equity mutual fund. On the other hand, a mutual fund is a financial instrument that is made up of money collected from various investors who invest in securities, bonds, and stocks as per the scheme that the investor has selected.
After getting a brief idea of what is an arbitrage fund, you might wonder about the benefits these funds hold.
Benefits of investing in arbitrage funds
- Ideal investment in a volatile market: One of the primary advantages of such funds is that arbitrage funds are one of the few low-risk securities that have a high potential to flourish even in a highly volatile market.
- Low risk: As mentioned earlier, these are low-risk securities as the securities are bought and sold simultaneously, which reduces the risk that is associated with long-term investments.
- Treated as equity funds: An arbitrage fund comprises investments in both equities and equity-related securities; therefore, the tax implication is similar to that of equity. Here, the tax rate is based on the holding period.
Drawbacks of investing in arbitrage funds
- Unpredictability: Investors might refrain from arbitrage funds as they generally do not perform well when the market is stable. If the profitable arbitrages are not available in a stable market, this fund might turn into a bond fund and lose its profitability.
- High cost of investment: The expense ratios of arbitrage funds tend to increase as they are traded frequently and attract transaction costs.
How to invest in arbitrage funds?
- Sign up and create a mutual fund account with any Asset Management Company (AMC)
- Submit and verify your KYC documents
- Based on your financial goals and requirements, risk tolerance, and investment horizon, identify the funds and schemes that will suit you best
- Choose the appropriate arbitrage fund according to your portfolio and transfer the required amount
What are some best arbitrage mutual funds in India?
Nippon India Arbitrage Fund, Edelweiss Arbitrage fund, UTI Arbitrage Fund, Kotak Equity Arbitrage Fund are some of the best arbitrage funds to invest in India.