Close Menu
Masstamilan
    Facebook X (Twitter) Instagram
    Trending
    • Your Voice, Their Expertise: Communicating Effectively With Your Work Injury Lawyer
    • What Your Accountant Can Teach You About Sustainable Financial Growth
    • What You Need To Know Before Getting Dental Implants
    • Dental Sealants: A Preventive Service For Kids And Teens
    • The Role Of A Family Dentist In Navigating Dietary Impacts On Oral Health
    • How General And Cosmetic Dentistry Combine For Complete Smile Care
    • From Prevention To Perfection: Bridging The Gap Between General And Cosmetic Dental Care
    • The Most Common Treatments Offered By General Dentists
    Facebook X (Twitter) Instagram
    Masstamilan
    Contact US
    Wednesday, July 9
    • Home
    • News
    • Business
    • Technology
    • Entertainment
    • Social Media
    • Fashion
    • Health
    • Travel
    Masstamilan
    Home»Business»Arbitrage funds basics, risks and benefits
    Business

    Arbitrage funds basics, risks and benefits

    JonathonBy JonathonOctober 4, 2022Updated:October 8, 2023No Comments4 Mins Read

    Arbitrage funds have emerged as a popular investment option for many Indian investors seeking moderate returns with relatively lower risk compared to pure equity funds. Arbitrage funds aim to generate steady returns by leveraging pricing inefficiencies between equity markets and derivatives markets.

    What are arbitrage funds?

    Arbitrage funds are open-ended mutual fund schemes that take advantage of differential pricing for the same asset trading in different markets. For example, when futures contracts of a stock are overvalued compared to the underlying stock trading in the spot market, the fund manager will simultaneously buy the stock in the spot market while selling futures in the derivatives market. This helps lock in the arbitrage spread from the pricing gap between the two markets.

    As arbitrage funds look to profit from price discrepancies rather than market direction, they carry lower risk than conventional equity funds. At the same time, arbitrage funds target moderately higher returns than fixed income funds by exploiting arbitrage opportunities. The key is to hedge the exposure using derivatives to minimize directional risk.

    Types of arbitrage strategies

    Fund managers employ various types of arbitrage strategies based on prevalent opportunities and market conditions:

    1. Index arbitrage – This involves arbitraging the pricing differences between index futures like Nifty futures compared to the underlying basket of index constituent stocks. Funds buy/sell the index while simultaneously selling/buying the individual stocks to lock in risk-free arbitrage gains.
    2. Cash futures arbitrage – Here the fund manager exploits the mispricing between single stock futures and the underlying shares. When futures are overpriced, the fund buys shares in spot and sells equivalent futures to pocket the spread.
    3. Corporate bond arbitrage – This strategy taps the spread between corporate bonds and gilt securities of similar maturity. Funds buy the lower yielding bonds while shorting the higher yielding securities.
    4. Multi-asset arbitrage – Under this, fund managers identify and combine arbitrage opportunities across various assets like equities, bonds, currencies and derivatives to construct an optimal market-neutral portfolio.

    Based on prevailing market signals, fund managers actively employ the most profitable arbitrage strategies at any point.

    Risk and return profile

    The risk profile of arbitrage funds lies somewhere between fixed income and equity schemes. The hedged arbitrage positions make them less risky than direct equity investments. However, some market risk remains due to fluctuations in spreads and volatility. Liquidity risks also exist in case of thinly traded securities.

    Hence, arbitrage funds are typically rated as moderate risk investment options. They carry relatively lower risk than pure equity schemes. However, arbitrage funds are not completely risk-free and see marginally higher risks than liquid funds or ultra-short bond funds.

    In terms of returns, arbitrage funds aim to generate steady annual returns in the range of 6-9% based on successfully capturing spreads. The returns are more stable than equity funds but lower than the best performing debt funds. Arbitrage fund returns have low correlation with equity and debt assets, making them an effective diversifier.

    Taxation and lock-in

    Most arbitrage funds have a lock-in and levy an exit load if units are redeemed before a month or year. This ensures adequate time for the fund manager to capture spreads on arbitrage positions.

    For taxation, arbitrage funds are treated like equity funds. Long term capital gains over 1 year are taxed at 10% while short term gains under 1 year are taxed at 15% as per income tax rules. Dividend payouts from arbitrage funds are tax-free in the hands of investors.

    Conclusion

    Assessing the fund manager’s capability, portfolio composition, risk management and overall market conditions is important before investing. Used prudently within asset allocation limits, arbitrage funds can enhance portfolio diversification and risk-adjusted returns for investors suited to their moderate risk-return profile.

    Jonathon

    Recent Posts

    How Technology is Enhancing Live Concerts and Events

    June 15, 2025

    Unlocking Performance and Reliability with PTFE Bearings

    June 4, 2025

    E-Bike Motor Types and Their Heat Tolerance: A Technical Breakdown

    May 20, 2025

    Why Proxy Comparison Tools Are Essential for Competitive Digital Operations

    May 17, 2025

    Power of AI in Digital Content Creation – Face Swap and Lip Sync AI

    April 24, 2025

    The Best Private Jet Travel Tips from Industry Experts

    April 17, 2025

    The 10 Best Romantic Hotels in Fiji for Couples

    March 28, 2025
    Categories
    • Apps
    • Automotive
    • Business
    • Digital Marketing
    • Education
    • Entertainment
    • Fashion
    • Food
    • Health
    • Home Improvement
    • law
    • Lifestyle
    • News
    • Pet
    • Real Estate
    • Social Media
    • Sports
    • Technology
    • Tips
    • Travel
    • Website
    • Contact us
    • Privacy Policy
    Masstamilan.biz © 2025, All Rights Reserved

    Type above and press Enter to search. Press Esc to cancel.