Most investors prefer to stay away from investing in equity markets because of their inherent volatility. However, experienced investors know that this same volatility can be leveraged to create investment opportunities. An Arbitrage fund relies on market volatility to make money and has gained a lot of traction in recent years. In this article, we’ll try to cover everything you need to know about arbitrage funds.
Table of Contents
What are Arbitrage Funds?
Arbitrage refers to the simultaneous buying and selling of securities, commodities, or currencies from different markets to take advantage of price differences. To exploit the price difference between the stock and derivative market segments, arbitrage funds invest in stocks as well as equity derivative instruments that match securities and volumes.
How Arbitrage Fund Works?
A fund manager evaluates the price difference between spot and futures market securities. If the price is higher on the spot market, the fund manager buys the security on the futures market. At the same time, the fund manager sells the same quantity of the securities on the spot market. A fund manager’s gain is the difference between the price of financial assets in both markets, excluding other expenses.
Advantages of Arbitrage Fund
Arbitrage funds offer the following benefits:
- Low Risk: The risk associated with arbitrage funds is low. As securities are bought and sold simultaneously, there is minimal risk compared with longer-term investments. Additionally, they invest in stable debt securities, making them appealing to those looking for a low-risk investment.
- Adapt to volatile markets: During periods of high market volatility, arbitrage funds are among the few low-risk investments that may perform well. The difference between the cash and futures markets increases when prices are unstable. These funds may benefit from calm markets when stock prices remain relatively stable.
- Suitable for Cautious Investors: The arbitrage fund is a suitable choice for cautious investors who wish to take advantage of market volatility without taking on excessive risk.
How to Invest in an Arbitrage Fund?
Follow the below steps to invest in arbitrage funds:
Step 1: Register online on the Axis mutual fund app or website.
Step 2: Under the Mutual Funds section, you can choose an Arbitrage fund.
Step 3: Click on Invest and select the amount and investment mode (SIP or lump sum).
Step 4: Fill out your KYC information (PAN number, bank details) and complete your investment.
Essential Things to Remember When Investing in Arbitrage Funds
Before investing in arbitrage funds, consider the following factors:
- Financial goals: The objective of the fund should be aligned with your financial goals. For short- to medium-term goals, arbitrage mutual funds are ideal.
- Cost involved: Mutual fund investments involve various costs, such as entry and exit loads, expense ratios, etc. Before investing in arbitrage funds, investors should review these expenses. These funds may incur high transaction costs and a high turnover ratio due to frequent trading.
- Fund performance: To select a reliable fund, investors should measure the fund’s performance in both bearish and bullish markets. Mutual funds that invest in arbitrage are known for their mediocre reliability. Nevertheless, these mutual funds are among the few low-risk investments that can perform well in volatile markets.
- Return on investment: For investors who understand how these funds work, these funds can earn reasonable gains. In arbitrage mutual funds, an investor seeking moderate returns from their investments might consider investing in a fund.
Conclusion
Arbitrage funds offer investors an opportunity to take advantage of market volatility while minimizing risk. These funds exploit price differentials between markets, which makes them a low-risk investment option. Investors need to consider several factors before investing, including their financial goals, associated costs, fund performance, and tax implications. Overall, arbitrage funds can be valuable components of a diversified portfolio, offering stability and potential gains during market downturns. Investors can achieve their financial goals effectively by understanding how these funds work and doing thorough research.
