Arbitrage Funds – A Category of Mutual Funds

Arbitrage funds are a special type of mutual funds. Although, they are very less known to many investors. financial advisors recommend these types of funds to those investors who have a low-risk appetite.  This post discusses the arbitrage funds with their advantages and disadvantages.

arbitrage funds

What are Arbitrage Funds?

Arbitrage funds are those types of mutual funds which take benefits of the price difference between different exchanges. These funds make a profit by buying and selling the securities on a price difference between cash and derivatives market. It buys stock in the cash segment of the stock market on a lower price and sells this stock in the future segment on a higher price and vice-versa.

Let us consider an example. Let the price of 1 share of a company XYZ is Rs 1,000 in the cash segment of the stock market and at the same time, the share price of XYZ is Rs 1020 in the future segment of the stock market. Let the fund manager of this arbitrage mutual fund buys the share of XYZ company and shorts future contract to sell the shares at Rs 1020. At the end of the month, when the prices coincide, the fund manager sells the shares in the future market and makes a profit of Rs 20 per share. This process is also reversed by the fund managers in order to make the profit.

Advantages of Arbitrage Funds

Following are the advantages of the arbitrage funds:-

  • Low Risk, especially on long-term investments.
  • High stability, due to investment in debt securities.
  • Adaptable to the volatility in the market.
Disadvantages of Arbitrage Funds

Following are the disadvantages of the arbitrage funds:-

  • They are not profitable stable markets.
  • High expense ratio.
  • Unpredictable payoff.
Top Ranked Arbitrage Funds

Following are the top-ranked mutual funds by Crisil:-

  1. IDFC Arbitrage Fund (Direct) – Rank: 1
  2. Kotak Equity Arbitrage Fund (Regular) – Rank: 1
  3. Reliance Arbitrage Fund (Direct) – Rank: 2
  4. Invesco India Arbitrage Fund (Regular) – Rank: 2
  5. HDFC Arbitrage Fund (Direct) – Rank: 3

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Disclaimer: This post is meant for educational purpose only. Please contact your financial/investment advisor for necessary suggestions.

Tags: #Mutual Funds #Arbitrage Funds #Investment

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