What is an Arbitrage Fund?
An Arbitrage Fund primarily invests in equity and derivative instruments. It exploits temporary price mismatches between the spot market and the futures market. For example, if a stock is priced lower in the cash market and higher in the futures market, the fund buys in the cash market and sells in the futures market, locking in a risk-free profit. This strategy ensures minimal exposure to market volatility.
Why Consider Arbitrage Funds?
- Low Risk: Since positions are hedged, the risk is significantly lower compared to pure equity funds.
- Tax Efficiency: Arbitrage Funds are treated as equity funds for taxation, making them more tax-friendly than traditional debt funds.
- Better than Idle Cash: They often provide higher returns than savings accounts or liquid funds during volatile periods.
Arbitrage Fund vs Balanced Advantage Fund
While Arbitrage Funds focus on exploiting price differences, Balanced Advantage Funds dynamically allocate between equity and debt based on market conditions. Balanced Advantage Funds aim for long-term wealth creation with controlled risk, whereas Arbitrage Funds are ideal for short-term parking during uncertain markets.
Who Should Invest?
If you have surplus funds and want to avoid market risk while earning better returns than a savings account, Arbitrage Funds are a smart choice. They work best when markets are volatile, as price discrepancies are more frequent.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.