Arbitrage Funds – Exploring this Fascinating Fund
WHAT IS AN ARBITRAGE FUND?
Arbitrage funds work on the mispricing of equity shares in the futures and spot market. Technically, it exploits the overall price differences between future and current securities to generate returns. The fund manager buys shares in the cash market and furthermore, sells it in derivatives or futures market. The difference in the cost and selling price is the return you end up earning.
ROLE OF ARBITRAGE FUND MANAGER
Arbitrage funds leverage the inefficiencies of the market to generate profits for their investors in the intermediate horizon, thus, taking care of the equity exposure. Later, the fund manager allocates the remaining assets in the fixed-income generating instruments. Whilst doing this, the fund manager ensures that the investment is made only in high-quality debt securities like term deposits, zero coupon bonds, and debentures. This will help to keep the fund returns in line along with the expectations during the period of inadequate arbitrage opportunities.
WHO SHOULD INVEST IN ARBITRAGE FUNDS?
Arbitrage funds make money from low risk buy-and-sell opportunities available in the futures and cash market. The risk profile is the same as that of a debt fund. These funds are tailor-made for investors who are looking for equity exposure but are prudent of risks associated with them. Arbitrage funds are a safe option for the risk-averse individuals who park their surplus money only when there is fluctuation in the market.
THINGS TO CONSIDER AS AN INVESTOR
- Cost of Investment: It becomes an important consideration whilst evaluating arbitrage funds; they charge an annual fee known as the expense ratio. It includes fund managers fees and fund managing charges.
- Risk Factor: There is no such counter-party risk in these funds as trades occur on the stock exchange. Even when the fund manager is buying or selling shares in the futures and cash market there is no risk exposure to equities. However, the ride looks smooth, but don’t get comfortable with these funds.
- Return: It may be a good opportunity to make better returns, especially for those who can understand it and make the majority. The fund manager generates an ‘alpha’ using price differentials in the market. Make sure you keep in mind that arbitrage funds give no guarantee returns.
- Financial Goals: If you have short- or medium-term financial goals, then these funds are your pick. Instead of putting your money in a savings account, you can park in these funds in order to create an emergency fund and earn high returns. In case, if you are already invested in high-risk equity funds, then you can opt for a systematic transfer plan from equity funds to less-risky funds (like arbitrage funds).
- Investment Horizon: Arbitrage funds are suitable for investors having a term horizon of 3-5 years. Though these funds charge exit loads, you can consider them only when you are ready to stay invested for minimal 3-6 months.
TOP 5 ARBITRAGE FUNDS
|L&T Arbitrage Opportunities Fund Regular Growth|
|Reliance Arbitrage Fund – Growth|
|Kotak Equity Arbitrage Fund Growth|
|SBI Arbitrage Opportunities Fund Regular Growth|
|UTI Arbitrage Fund Regular Plan Growth|
Note: Investors should choose the funds as per their goals. Possibly, returns are subject to change.
Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.