The main purpose of investing is to accumulate money over time, whether for retirement, property ownership, college, or other financial objectives. Bonds, stocks, real estate, mutual funds, and other investment alternatives are available to investors these days. Investments are risky, and the return on investment is not guaranteed. It can change depending on market circumstances, investment types, and other economic factors.
Before investing, one of the most typical questions that any investor has is where to invest and the risk involved in the same. So as compared, mutual funds are typically safer than stocks since they are automatically diversified, which helps to reduce risk and volatility in your portfolio.
One such type of mutual fund is an Arbitrage Fund. It is a type of fund that is considered a valuable investing instrument that investors may utilize to save their short-term profits. And can also be a good choice for those investors who want to profit from a volatile market without taking on too much risk. Although arbitrage funds have relatively lower risk, the payoffs can be unpredictable. They are a form of mutual fund that aims to purchase and sell assets in multiple markets simultaneously to capitalize on mispricing opportunities. They are hybrid since they have the option of investing a significant portion of their holdings in debt markets.
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These funds seek to capitalize on price differentials in two marketplaces: cash markets and futures markets. They buy equities in the cash market and sell them in the futures market simultaneously, thereby “locking in” the price discrepancy, known as the spread. It also follows a market-neutral strategy, which means it aims to be largely uncorrelated with the overall market direction. This can be beneficial during times of market volatility or economic uncertainty.
Usually open-ended, arbitrage funds give investors flexibility and liquidity by enabling them to purchase and sell units at any time of the day. These funds frequently make investments in a diverse range of fixed-income securities, derivatives, and equities. By distributing risk among several asset classes and instruments, diversification may be beneficial. Several countries have favorable tax laws for arbitrage funds. For instance, after a year of ownership, in India, they are considered equity-oriented funds and are eligible for long-term capital gains tax incentives. This might result in higher after-tax returns. Arbitrage funds usually make investments in a wide variety of assets, including derivatives, equities, bonds, and so on. This diversification can help disperse risk among various instruments and asset classes.
However, it is crucial to remember that the precise investment criteria used by different arbitrage funds may differ. These criteria include tax considerations, asset selection, risk management, market conditions, and diversification. These criteria are intended to assist the fund in capturing pricing discrepancies or inefficiencies while controlling risk. Fund managers discover and capitalize on the most attractive arbitrage opportunities using their experience and research. Investors interested in these funds should also carefully read the prospectus and investing plan to understand the fund’s particular requirements.
In summary, arbitrage funds are special in the investing world since they give investors a mix of stability and possible returns. They are an essential aspect of a diversified portfolio, especially in this unpredictable age of economic and financial instability. Because of its open-ended nature, market-neutral strategy, and ability to prosper in difficult times, arbitrage funds are a valuable ally for astute investors.
(By Gurmeet Singh Chawla, Director, Master Capital Services Ltd)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.