Mutual fund investors in India constantly look for opportunities to maximize their returns. Arbitrage funds leverage opportunities in the stock market to help investors earn an extra profit. They do this by taking advantage of the price mismatches between various stock exchanges and the differences in pricing in the spot and futures markets. This article shall elaborate on why you must consider arbitrage funds as investment opportunities, exploring who should consider investing in them and the benefits they offer.
Who should invest in arbitrage funds?
Investors looking to explore the price differences between the cash and futures markets
Arbitrage funds help investors who want to tap into the price discrepancies between the cash and futures markets. These funds buy stocks in the cash market and simultaneously sell futures contracts of the same stocks when they are trading at a higher price in the futures market. This strategy allows investors to profit from the price differential.
Investors who wish to benefit from the price difference between exchanges
Different stock exchanges often have variations in the prices of the same stock. Arbitrage funds seize this opportunity by purchasing the stock on the exchange where it’s cheaper and selling it on the exchange where it’s priced higher. The price difference represents a profit for the fund and, in turn, its investors.
Investors wanting to make a moderate-to-low-risk investment
Arbitrage funds are known for their relatively low-risk profile compared to many other mutual fund categories. Since they aim to capitalize on price discrepancies rather than market direction, the potential for significant losses is minimized. Investors who prioritize capital preservation while seeking steady returns may find these funds appealing.
Investors in the higher tax bracket who wish to save more on taxes
Arbitrage funds can be tax-efficient investments, especially for those in higher income tax brackets. They typically attract a lower tax rate when compared to traditional equity mutual funds because they are equity-oriented funds from the point of view of taxation.
Investors with an investment horizon of at least 3 months
Arbitrage funds are not designed for short-term traders. Investors should have a relatively longer investment horizon, ideally at least three months or more to benefit from the price discrepancies and ensure that transaction costs do not erode potential gain.
What are the benefits of investing in arbitrage funds?
Investing in arbitrage funds offers several notable advantages:
- Arbitrage funds offer lower risk: Arbitrage funds tend to have lower risk profiles compared to many other investment options.
- These funds are tax-efficient: These funds often enjoy tax benefits, especially for investors in higher tax brackets.
- Arbitrage funds help investors diversify: Arbitrage funds typically hold a diversified portfolio of stocks, reducing the risk associated with individual stock investments.
- Arbitrage funds offer steady returns: Arbitrage funds aim to provide steady and consistent returns over the medium term.
Arbitrage funds offer a unique investment opportunity for those who wish to capitalize on market inefficiencies and price differentials. They are especially suitable for risk-averse investors, tax-conscious individuals, and those with a longer investment horizon. However, investors must understand the fund’s strategy, associated risks, and tax implications before investing. They must also research and compare arbitrage funds online to be able to make a better investment decision.