Understanding Arbitrage Funds: A Guide for Investors
What are arbitrage funds? How they work, who should invest, and other details
Mint
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Arbitrage funds are low-risk hybrid mutual funds that exploit price differences between cash and futures markets to generate profits. Suitable for short- to medium-term investment goals, these funds require careful consideration of asset allocation and management fees before investing.
- 01Arbitrage funds exploit price differences between cash and futures markets.
- 02They must invest at least 65% of their funds in equities as per SEBI guidelines.
- 03Investors should consider a short- to medium-term horizon of 3-6 months.
- 04Understanding the scheme offer document is crucial before investing.
- 05Management fees are charged as a percentage of assets under management.
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Arbitrage funds are low-risk hybrid mutual funds that profit from price discrepancies between cash and futures markets. They typically buy shares in the cash market and sell them in the futures market, locking in profits regardless of market direction. According to the Securities and Exchange Board of India (SEBI), these funds must allocate at least 65% of their investments in equities. For example, if a company's share is priced at βΉ500 in the cash market and βΉ510 in the futures market, the fund manager can lock in a profit of βΉ10 per share through simultaneous transactions. While these funds are designed to minimize price risk, they are not entirely risk-free, especially in bearish markets where futures may trade at a discount. Investors are advised to have a short- to medium-term investment horizon of 3-6 months and to invest through a lump sum rather than systematic investment plans (SIPs). Before investing, it is essential to read the scheme offer document for details on investment strategies, risks, and fees. Management fees, charged as a percentage of assets under management, will also affect returns.
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Investors seeking stable returns in volatile markets can benefit from arbitrage funds, making them a viable option for short- to medium-term financial goals.
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