Six things to know before investing in arbitrage funds

 

Six things to know before investing in 

Arbitrage funds

Arbitrage funds are a popular investment option in India, offering lower risk and steady returns amid market volatility. These mutual funds exploit price discrepancies between cash and derivatives markets, enabling investors to secure profits with minimal risk. Here’s what you should know before investing in arbitrage funds:

• Arbitrage funds use a hedging strategy, buying securities in the cash market and selling them for future settlement to minimize risk
• Returns are based on price differences rather than market direction.
• Around 65-85 per cent of the portfolio is invested in large cap stocks with arbitrage potential. Around 15-35 per cent is allocated to corresponding futures contracts
• Algorithms automatically identify and execute arbitrage opportunities, ensuring quick action without manual intervention.
• Arbitrage funds thrive in volatile markets but may offer below-average returns when markets are flat.
• Arbitrage funds typically provide lower returns than pure equity funds during bullish markets.

 

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