Arbitrage funds play a useful role in a balanced portfolio. They provide low-risk returns by taking advantage of price differences between the cash market and futures market. These funds are good for investors who want stable growth with lower risk, especially during market ups and downs. Including arbitrage funds in a portfolio helps to balance risk and return.
What Are Arbitrage Funds?
Arbitrage funds are mutual funds that make money from the price difference of the same stock in the cash and futures markets. These funds buy in one market and sell in the other at the same time to earn profit with very little risk.
They are treated like equity for tax purposes but behave like low-risk debt funds in terms of returns.
Why Add Arbitrage Funds to a Portfolio?
Arbitrage funds are a smart choice for a balanced portfolio because they offer stable returns with lower risk. They act as a cushion when equity markets are volatile and help in maintaining steady performance.
These funds are also tax-efficient and provide better returns than regular savings accounts or short-term deposits.
How Do Arbitrage Funds Work?
Arbitrage funds work by buying stocks in the cash market and selling them at a higher price in the futures market. This locks in profit from the price difference, with minimal market risk.
Fund managers also park some money in debt instruments to earn additional income and keep liquidity.
When Should You Invest in Arbitrage Funds?
Arbitrage funds are best during times of high market volatility when price gaps are bigger between spot and futures markets. They are also a good option for short-term investments of 3 to 6 months, especially if you want low-risk returns.
These funds are also useful when you are unsure about equity markets but still want tax benefits.
What Are the Benefits of Arbitrage Funds?
Arbitrage funds offer many benefits in a portfolio:
- Low market risk
- Tax benefits like equity funds
- Stable returns in short term
- Good alternative to liquid and short-term debt funds
- Can be used during uncertain market conditions
These qualities make arbitrage funds a useful part of a diversified investment plan.
Are Arbitrage Funds Right for Every Investor?
Arbitrage funds are best for investors who want safe and tax-efficient returns without too much market risk. They are not meant for long-term wealth creation but work well for short-term parking of money.
If you want to reduce risk in your portfolio and balance your equity exposure, arbitrage funds can be a smart choice.
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