In this article, we’ve brought together all the information around Arbitrage Funds. So, you can confidently proceed with your investment decision.
It is a good idea if you are planning to invest in mutual funds. But do not come to a final decision if you aren’t sure whether it’s good or bad for you.
A moment ago, if someone advised you to put your money in arbitrage funds, don’t proceed until you are fully aware of how these funds work.
What are Arbitrage Mutual Funds?
Arbitrage funds are unlike standard hybrid funds or equity funds. These funds are more like an opportunity to the investors.
For instance, these get the advantage of price mismatch by purchasing an asset at a lower price in one market and selling it at a higher price in a different market.
In this way, these funds often generate higher returns.
In most instances, the purchased stocks are sold out at a higher price in the same futures contract market that enables these funds to generate profits in a reasonable amount from transactions.
Though, these funds are somewhat similar to the equity-oriented hybrid funds. But these funds also invest in the money market or short-term debt instruments.
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How does an Arbitrage Funds work?
Arbitrage Funds generate income from price differentiation. The fund managers who handle these funds keep their eyes on the current stock market and futures market.
If the Future market goes through a bullish phase, a big boom in stock prices will indicate a profitable situation to the fund managers.
Similarly, they’ll sell out the entire purchased stock. If the Future Market goes through a bearish phase, a big downturn in the prices will indicate a loss situation to the fund managers.
Hence, they will strive to purchase more quantity of the ‘stock’ with a view to sell them at higher prices on the occurrence of some favorable condition in the market.
Example of Arbitrage Mutual Funds
Let’s understand more about Arbitrage Mutual Funds through an example.
A fund purchased securities in the market at a low price with a plan to sell them when their price goes higher, which is more likely to happen in the bullish market.
The current price of these investments will be known as the spot price. The fund managers then set an anticipated cost of these purchased securities higher than their spot price.
For instance, if the current value (spot price) of a stock of ABC company is Rs 50, the fund manager can set an anticipated price of Rs 70 in a bullish market.
Though, the market is unpredictable; hence, the investors will achieve the goal or not is often difficult to define.
On the other hand, in the bearish market, the fund managers try to sell the lower-priced contract at a higher price in the cash market.
Who should you Invest in Arbitrage Funds?
Here are some of the best listed reasons to invest in Arbitrage Mutual Funds –
- Arbitrage funds can be the best option for risk-averse investors. Arbitrage funds get the benefit of price fluctuation in the market. In a volatile market, these funds try to generate maximum profits. But, if there’s no movement in the price, these funds generate no profit or perhaps invite small losses.
- Though, these funds also invest in asset classes with lower risk. But they don’t generate higher returns.
- The investor who seeks a short-term investment opportunity that generates a higher return can get more out of their arbitrage funds expectations.
- These aren’t available at all times. Only in an exceptional condition or uncertain climates, these funds prove to be an ample opportunity to the investors. That’s why these funds can’t be a permanent option for investment.
Benefits of Investing in Arbitrage Mutual Funds
Here are valuable benefits of Arbitrage Mutual Funds –
Arbitrage Funds are less risky as compared to other mutual funds. Though, many times, this point of arbitrage fund is compared with a debt fund.
But these funds come with more attractive features. Investors who are ready to take losses similar to the debt funds but want to generate profit like equity funds can confidently invest in arbitrage funds.
Generate Higher Returns from Unstable Markets
These funds are supposed to generate a higher return in the unstable market. These funds chiefly seek opportunities when the market is going through extensive twists and turns.
It’s an added advantage of the Arbitrage Funds. Other mutual funds incur big losses in a highly volatile market, whereas arbitrage funds view it as a great opportunity.
But, these funds can fail to perform in the stable market; that’s a significant shortcoming of arbitrage funds.
Taxed as Equity Funds
Arbitrage Funds are taxed as equities because these funds are indeed a type of hybrid funds. For instance, 65% of these funds consist of equities components.
Therefore, if you don’t want to invite higher tax on capital gains, try to hold these funds for more than a year.
Things to consider before Investing in Arbitrage Funds
Not everyone guides you on how you should invest in arbitrage funds. Every investment comes with a significant loss and profit.
Hence, an investor must evaluate every single point regarding the risk involved, proficiency of a company, history of returns, etc.
Let’s have a look at the chief points to consider before investing in Arbitrage Funds.
Come up with a clear and well-informed financial goal. Arbitrage funds are a better alternative to a short term investment.
These funds can provide you with higher returns, similar to the returns from equities.
That’s why if you wish to park your money in an investment that helps you in achieving your financial goal, this option is more likely to live up to your desires.
Alongside, you also get tax benefits if you invest for more than a year.
Fund Houses & Management
It’s another critical point that one must consider before taking action for investment in Arbitrage Funds.
How the fund house provides you services? What qualifications and expertise do the fund managers hold? Tick mark all these points in your checklist.
If the fund house answers instantly to any of your queries, it’s a positive sign of their authenticity. This point plays a very decisive role.
Experienced and skilled management can handle your money efficiently, which is essential in Arbitrage Funds.
Many times, it’s hard to get an idea about the fund house performance. How it’s performing often remains the subject of uncertainty.
Even though the fund house management is excellent and experienced, their historical performance will still help make a well-informed decision.
Such as how the fund house is performing in the bullish and bearish market. Are they taking full advantage of the budding opportunities?
If yes, then they are actively working. Hence, you can proceed with investment in Arbitrage Funds.
Every Mutual Fund comes with a hidden charge. Identifying them before can avoid chopping off the returns.
So make sure you first determine the expense ratio, entry fees, and exit fees, so later, these little things don’t come forefront as an irritating point. Generally, arbitrage funds come with a higher expense ratio.
That’s why, sometimes, investors step back from these funds because it can prove to be a significant financial loss if the market isn’t acting well as per the arbitrage funds requirement.
Arbitrage funds aren’t entirely risk-free. In most instances, the investment journey in these funds seems to be smooth. But don’t forget that market is a big player, so do not take these funds lightly.
These funds reap the benefit of market volatility. These funds flourish exceptionally well in the market with lots of twists and returns.
But, sometimes, a stable market can invite further trouble for investors. But smart fund managers find the way out of such situations with their experience.
Hence, if you want to capture a big feast of returns, you’ll first have to choose a reliable fund house where you can confidently park your money.
Others Basics from the Portfolio
Don’t skip any necessary information at the time of initiating paperwork.
Investors usually ignore some precious points that are critical to note down before proceeding with investment, e.g., AUM (Asset Under Management), NAV (Net Asset Value), etc.
These little details highlight the reliability of the fund house and the engagement of other investors with them.
Arbitrage Funds – Conclusion
In a nutshell, Arbitrage Funds are the best option for investors with the lowest risk appetite and high craving for return.
For instance, it is for investors who want to enjoy a higher return rate that one gets from investment in equities but want to feel safe like they feel after investing in a debt fund.
No wonder, this option will surely live up to their expectations. If you have a short term goal, Arbitrage Funds undoubtedly can prove to be the option for you.
If the market is going through massive twists and turns, these funds can hit a big jackpot for you. Even though the market is constantly declining, fund managers’ expertise can drive profits out of it.
So, make sure you don’t overlook the points you need to remember while selecting a fund house.
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