Investment in Arbitrage Funds: Should You Continue?
To start with answering your question, it's important to understand how arbitrage funds work. Arbitrage funds leverage the price differential between the cash and derivatives markets to generate returns. If you are wondering whether you should continue investing in these funds, or if there are better options available, this article will cover the pros and cons of arbitrage funds and explore potential alternatives.
What are Arbitrage Funds?
Arbitrage funds are designed to create market-neutral positions. This means the fund manager buys securities in the cash market and simultaneously sells in the futures market. By doing so, they exploit any discrepancies in the prices of the same or similar securities to generate profits. Since the fund is structured to be market-neutral, market volatility does not significantly impact the risk profile for the investors.
Arbitrage opportunities are typically found during periods of market instability and uncertainty, as market inefficiencies provide these opportunities.
Additionally, one of the key benefits of investing in arbitrage funds is the tax advantage. You can sell your holdings in these funds after one year without incurring any tax liability.
Investment Risks and Returns
Arbitrage funds are generally considered safe with very low risk. However, the returns they offer are typically lower compared to other types of mutual funds. According to recent analysis, arbitrage funds have been known to offer returns in the range of 5-6%, while debt funds have offered returns of 8-9%.
When to Invest in Arbitrage Funds
Financial planners often recommend arbitrage funds for individuals with a low risk appetite. If your investment horizon is more than 3 years, it would be advisable to consider debt funds as an alternative. Debt funds, while carrying a slightly higher risk, can offer potentially higher returns over a longer period.
One of the key benefits of debt funds is that you can benefit from indexation on capital gains after holding them for 3 years. This is particularly advantageous for those looking to minimize tax liabilities.
Alternatives to Arbitrage Funds
For those considering alternatives to arbitrage funds, there are several options available. Debt funds, mentioned earlier, are a popular choice due to their lower risk and stable returns. They are suitable for investors with a moderate to high risk appetite who are unwilling to assume significant market risk but still want the stability of a lower-risk investment.
Additionally, equity funds can be considered. These funds invest in securities such as stocks, providing the potential for higher returns. While they carry higher risk compared to arbitrage funds, they can be a better fit for investors with a higher risk tolerance.
Mutual funds that invest in commodities and real estate investment trusts (REITs) are other alternatives. These offer diversification and can provide returns that are not heavily dependent on the performance of the stock market.
Conclusion
Choosing the right investment vehicle is crucial for achieving your financial goals. While arbitrage funds offer low-risk, stable returns, debt funds and other alternatives such as equity and commodity funds can provide higher returns and better fit your investment horizon and risk tolerance.
If you need more information on how to invest in arbitrage funds or decide which type of fund is best for you, it might be beneficial to consult with a financial advisor or watch relevant educational content.
Thank you for considering this article, and we wish you the best in your future investments!