Arbitrage Mutual Funds- Key Features & Benefits

Amrina Alshaikh
May 23, 2020   •  18 views

Arbitrage mutual funds are those fund types which are suitable for investors desirous of making profits from markets that are volatile minus higher risks. Prior to investing in arbitrage funds India, you should know how these actually function and whether they are suitable for your portfolio.

What you should know is that these funds are suitable for investors who wish to take lower risks although returns are not always predictable. The taxation aspects are quite similar to those for equity funds. As an investor, you should always watch out for expense ratios or charges for managing the funds, which can be on the higher side.

Arbitrage Fund-How it basically works

When it comes to arbitrage mutual funds investments, they work on some core principles. Let us assume for instance, that there are arbitrages happening between the futures and cash markets. Usually funds buy stocks with the intention of selling them in the future when prices have increased. Rather, arbitrage mutual funds buy stocks in cash markets and sell the interest simultaneously in futures markets. The differences amongst futures contracts and stock prices are mostly smaller. Hence, these funds are required to execute trades in higher numbers every year for accumulating gains considerably.

A stock has a price in the cash market which is mostly called the spot price. The futures market is primarily based on derivatives and contracts are not valued on the basis of the present stock prices. Rather, they showcase the expected stock prices in the future. Stock shares do not instantly switch owners in this market. Shares are mostly transferred on the particular contract maturity date at the price that has been agreed upon. Arbitrage performance has to be carefully tracked in order to reap the rewards of a sustained investment plan. The arbitrage profit is basically the difference between the futures and cash prices for stocks.

Some vital benefits worth considering

Arbitrage mutual funds may also reap profits from stock trading on various exchanges. Index arbitrage is another category where the fund may look for profits while purchasing shares of an ETF (exchange traded fund) which is selling for lower value as compared to the underlying stocks. The fund will redeem ETFs instantly for stock shares and sell the same for profits. The fund should be authorized to participate in ETF markets for leveraging this strategy.

Here are some of the key advantages worth keeping in mind:

·        Lower Risk Levels- One of the key benefits is that the risk levels are lower since every security is purchased and sold at the same time. Some of the capital may be deployed into instruments like debt securities which are usually more stable.

·        Volatility Scenario- Arbitrage mutual funds are amongst the rare securities with lower risks that may do well in volatile markets. This makes them suitable if you are more cautious by nature and wish to profit from volatility in the market without unnecessary risks.

You should keep all these aspects in mind before investing. Make sure that you do your homework prior to signing on the dotted line.