Arbitrage funds provides a unique investment strategy that sets them apart from conventional equity and debt funds. For investors looking to diversify their portfolio and minimize risk, arbitrage funds can provide an attractive investment option.
Let’s explore what arbitrage funds are, how to invest in them, and why they might be an attractive option for your investment portfolio.
What is an arbitrage fund?
Arbitrage funds are a type of mutual funds that aim to generate returns by taking advantage of price differences between the cash (spot) and derivative (futures and options) markets. The strategy involves buying stocks in the cash market and simultaneously selling futures or options contracts of the same stocks. This approach allows investors to benefit from the price differential between the two markets while keeping their investments relatively low risk.
How to invest in arbitrage funds?
Choose the right fund house: The first step in investing in arbitrage funds is to select a reputable fund house. Research their track record, expertise, and arbitrage fund options they offer.
Select the right fund: Pick an arbitrage fund that works your financial goals and risk tolerance as the next step. Ensure you research well about the fund before zeroing in.
Open an account with the fund house or broker: If you don’t already have an account with the chosen fund house or a broker, you will need to create one. You can do this online or by visiting the fund house’s office. At this stage, it is important to ensure that you are KYC (Know Your Customer) compliant. This involves providing your identity and address proof, along with other required documents before you invest in mutual funds.
Choose between SIP and lumpsum investment: You can invest in arbitrage funds through a systematic investment plan (SIP) or as a lumpsum. An SIP allows you to invest a fixed amount regularly, while lumpsum investment involves making a one-time investment of a larger amount in one go.
Monitor your investments: Your job doesn’t end with setting up an SIP or investing a lumpsum. Ensure you keep a close eye on your investments and review your portfolio periodically. Make necessary adjustments based on your financial goals and market conditions.
Why consider arbitrage funds?
Below are some reasons why you could consider arbitrage funds.
Lower risk: Arbitrage funds are known for their lower risk profile compared to pure equity investments. The strategy aims to minimize market risk, making them suitable for conservative investors.
Tax efficiency for long-term investments: The returns from arbitrage funds are treated as capital gains and are subject to a lower tax rate when held for over a year. This makes them a tax-efficient option for long-term investors.
Steady returns: Arbitrage funds typically offer more stable returns than traditional equity investments. They aim to provide consistent gains over time, making them a suitable choice for those seeking regular income or stability in their investment portfolio.
Diversification: Including arbitrage funds in your portfolio can help diversify your investment portfolio, reducing the overall risk. Diversification can be valuable, especially during volatile market phases.
Hedge against market volatility: Since arbitrage funds take advantage of market inefficiencies, they can act as a hedge against market volatility. In bearish market conditions, these funds may still generate positive returns.
To wrap up
Arbitrage funds are a unique and innovative addition to your equity investment portfolio. Consult a financial advisor to ensure your investment strategy aligns with your unique financial objectives.