Best Arbitrage Mutual Funds

Arbitrage funds are the ones that aim at buying and selling securities in varied markets. This lets investors profit from price differences in the markets.

Note the cash market is where transactions are settled on the spot. Future markets are where you can buy or sell assets at a predetermined price on future dates. But, with arbitrage funds, to see substantial gains, one has to execute a large amount of trades since the difference in value is small. 

You can see some of the best arbitrage funds in the market today given in the table below.

These funds can suit investors who are:

1. Low-Risk Investors

Since the fund buys and sells securities at the same time, the transaction is practically free of the dangers associated with long-term investing. Arbitrage funds benefit from volatility. As a result, investors should not be concerned about volatility. Arbitrage opportunities will be accessible as long as the market moves in either direction, and arbitrage fund managers will be able to capitalize on them.

The factors that are to be considered before beginning to invest in arbitrage mutual funds are:

1. Return Factor

These are excellent funds to earn reasonable returns for those who understand it well. Given that they are a blend of equities and debt funds in a volatile market, they only come with moderate returns. 

2. Tenure of Investment

While finding the best performing arbitrage funds for investment, remember, since these funds carry exit loads, you should only consider them if you are prepared to stay invested for at least 3-6 months. 

3. Financial Goals

Arbitrage funds are appropriate if you have short to medium-term financial goals. Instead of a traditional savings account, you can utilize these funds to park excess funds to develop an emergency fund and earn better returns.

Here are some benefits of investing in the best arbitrage mutual funds: 

Minimal risk: Arbitrage funds can generate short-term returns by taking advantage of low-risk buy-and-sell opportunities that may arise. 

Higher returns than savings accounts: Arbitrage funds have the capacity to generate higher returns than a savings deposit account. They can also generate stable returns in volatile market conditions. 

Taxed as equity funds: Arbitrage funds are treated as equity funds for taxation purposes. It’s because these funds invest at least 65% of their assets in equity shares.

Choice of investment route: Investors can either choose the lump sum mode or systematic investment plan (SIP) option to allocate their funds to an arbitrage mutual fund. The former allows individuals to invest the entire amount in a fund all at once. By opting for the SIP route, one can invest in the best arbitrage mutual funds by paying fixed instalments at regular intervals. While the lump sum mode requires an individual to invest at least Rs.1,000, one needs Rs.500 to start investing via the SIP route.

While finding the top arbitrage funds for your portfolio, ensure to go through these risks-

1. Interest and Credit Risks

Arbitrage funds are hybrid funds that invest some of their assets in debt. These investments, however, are typically in term deposits or very short-term debt. As a result, while interest rate and credit risks exist, they are minor.

2. Flat Market

When markets are trading flat, arbitrage chances are limited. In such a case, arbitrage funds may yield below-average returns, which is one of the most notable risks associated with arbitrage funds.

3. High Expense Ratios

As effective arbitrage funds must execute a large number of trades, their expense ratios can be quite high.