Arbitrage funds offer a unique investment strategy, differentiating them from conventional equity and debt funds. Arbitrage funds can be an attractive investment option for investors looking to diversify their portfolios and minimize risk.
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 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 do you 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 its track record, expertise, and arbitrage fund options.
Select the right fund: As the next step, pick an arbitrage fund that meets your financial goals and risk tolerance. Ensure you research the fund well before zeroing in.
Open an account with the fund house or broker: If you don’t have an account with the chosen one, you must create one. You can do this online or by visiting the fund house. Ensuring you are KYC (Know Your Customer) compliant is important at this stage. This involves providing your identity, address proof, and other required documents before investing in mutual funds.
Choose between SIP and lumpsum investment: You can invest in arbitrage funds through a systematic investment plan (SIP) or as a lump sum. A SIP allows you to invest a fixed amount regularly, while a lumpsum investment involves making a one-time investment of a larger amount in one go.
Monitor your investments: Your doesn’t involve setting up SIP or investing in a lump sum. Ensure you closely monitor 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 than pure equity investments. The strategy minimizes market risk, making it 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 suitable 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: Arbitrage funds use market inefficiencies to 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.
