Arbitrage funds: A low-risk way to grow your money

Are you among those who feel tense with the uphill and downs of capital markets? But what if you can make returns without betting whether the market is up or down-it’s the core idea of ​​arbitrage funds, a unique category often related to investment in lower risk or short-term parking. In a special interview entitled ‘Understanding of Arbitrage Funds: A Smart Option for Volatile Markets’, Rukun Tarachandani, Executive Vice President and Fund Manager -Equity, PPFAS Mutual Fund talked about what exactly these funds are, how do they work, and is it the right fit for your portfolio? Read on to know more. How does arbitrage funds work? Simply put, arbitrage is a strategy that uses prices inefficiencies in different markets. “In a typical arbitrage transaction, we are what we do, buy a share in the cash market, and at the same time we sell the same share in the futures market. As you bought and sold the same stock, our position is completely hedged and the risk of the share price movement being minimized,” he explained. The return for an arbitrage fund is not derived from the direction of the share price, which means that it does not matter if the market is up or down. As Tarachandani puts it: “Your return comes from the cash price and the futures price that rallies at the expiration date.” This difference between the two prizes is the profit won by the fund. This unique mechanism makes arbitrage funds a fascinating alternative to traditional stock investments. Rukun Tarachandani in conversation with coin, can we say that since arbitrage funds are hedged, they are immune to market conditions? There are various factors that affect their performance and volatility in the market, can be a prosperity for these funds. “All the other things, yes, volatility helps arbitrage funds, because if markets are volatile, it will give the fund manager more opportunities to take advantage of the differences in the cash and futures market because it would be higher during volatile markets,” he further explained. In addition to volatility, other factors such as interest rates, market sentiment and the basics of supply and demand also play an important role. For example, bullish market sentiment mostly leads to higher arbitrage distributions, while a strong sentiment can weaken it. Similarly, the distributions tend to be lower than a large amount of capital goes to arbitrage opportunities. How do they do with other investments? Arbitrage funds are a good option for short-term parking. The other asset classes that appear in this category include fixed deposits and liquid funds. “Historically, the returns of the arbitrage fund were broadly similar to what the liquid fund returns were,” he said. However, an important distinction lies in their tax efficiency. “For investors in higher tax heels, this (arbitrage funds) would be more tax efficient against other cash management or other possibilities for cash management,” he explains. This can be a significant advantage for those in top tax hooks, as long -term capital gains are taxed from equity funds at a lower rate compared to debt funds or fixed deposits. Rukun Tarachandani Despite the tax benefit, it is important to remember that arbitrage funds are a little more volatile than liquid funds, especially if the investment is for short term. For this reason, Tarachandani advised investors to have a time horizon of at least three months, the longer, the better, as it allows the volatility to average. Who are they best suited for? So who should consider investing in arbitrage funds? According to Tarachandani, these funds are an ideal choice for investors in higher tax heels that have to park their funds for a three -month or longer period. Another useful application is for systematic transfer plans (STPS). An investor can park their surplus funds in an arbitrage fund and then systematically transfer it to a equity fund of their choice. Investors should also keep in mind that although low-risk arbitrage funds, they are not risk-free. The primary risks stem from the factors that affect their returns. The expansion or contraction of arbitrage distribution due to changes in interest rates, market sentiment and supply-demand dynamics may result in the fund’s net asset value (NAV). Arbitrage funds usually invest 65-70 percent of money in arbitrage opportunities, and the remaining portion in credit effects. A fund manager may take higher duration or credit risk in this debt portion to generate higher returns. “An investor must do careful caution to ensure that they are not exposed to an improper time risk or credit rate risk,” he said. This can be done by investigating the Fund’s Fact Sheet to understand its debt investment strategy. In conclusion, arbitrage funds provide a compelling mix of low-risk and tax efficiency, making them a valuable tool for smart investors. “We believe that the safety and liquidity of capital is the most important factor for an investor while investing in an arbitrage fund is the safety and liquidity of capital,” Tarachandani said. Take a look at the full interview: Investments in mutual fund are subject to market risks, read all scheme -related documents carefully. Disclaimer: The views and recommendations above are those of individual analysts or brokerage companies, and not of currency. We advise investors to check with certified experts before making investment decisions.