loader2
Partner With Us

What are arbitrage mutual funds?

An arbitrage fund is defined as a mutual fund that leverages the price difference in the cash and derivatives market to make a profit. In other words, the fund buys stock at regular cash rates and simultaneously sells them in the futures and derivatives market where the rates are slightly higher, or vice versa, and pockets the difference. These are also known as equity- oriented hybrid funds because they usually invest a large portion of the portfolio in equity and a part in the debt securities.

How it works:

For instance, many investors might feel that a particular stock which is valued at Rs 100 per share today is likely to go up over the course of the month. In which case, a futures contract, where you are betting on the price going up a month down the line, would be far more valuable. So an arbitrage fund would buy the stock at spot or current price, and immediately sell them in the futures market, where the price is slightly higher. This difference between spot and futures prices thus becomes a profit for an arbitrage fund.

Size matters:

Because these price differences are usually very small, a sizeable number of transactions are needed in order to make a profit. Arbitrage funds make sense for investors who are keen to profit from the stock market without too much risk exposure. Interestingly, these are the only funds with low risk that flourish when the market is volatile, leading to uncertainty among investors, and a rise in futures prices. During a stable period, however, the difference between futures and spot prices are minimal because investors don’t think the prices will fluctuate much over the month. Given the lack of profit during stable periods, the fund might invest in the bond market, which are far less profitable compared to the equity market.

Low risk:

Because these securities are bought and sold almost simultaneously, the risks associated with long term investments don’t apply. Most arbitrage funds park a lot of their corpus in debt, which is seen as reasonably stable. However, despite the relatively low risk compared to the equity market, it is important to keep in mind that these mutual funds have unpredictable returns, and have substantial transaction costs. This transaction cost is mainly due to the larger number of transactions that an arbitrage fund must make to generate reasonable returns.

Lower Tax:

If you hold your shares in an arbitrage fund for more than a year, any profit you make is taxed as capital gains, which is much lower than the regular income tax. Before you invest in these funds, or any other, you must map them against your investment goals and risk tolerance and see that they are aligned.

Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

Most Popular

f
  • 27 Sep 2021
  • ICICI Securities

The Five Rules of Investing in Equities

Investment in equity should be made by following certain rules. There are five rules of equity investments. They arise from an understanding of the stock market and mitigate the chances of making mistakes and incurring losses.

  • 27 Sep 2021
  • ICICI Securities

Investment Rules: 5 Thumb Rules of Investing in Market

While you work for money, suitable investments make your money work for you. How you take control of your finances determines the growth of your wealth and additional income streams. Click here to read about the five golden rules you can follow while investing.

  • 15 Sep 2021
  • ICICI Securities

5 Most Popular Reasons for Switching Bank

In the beginning, you would hear from them quite often. But of late, you're noticing more and more signs that it's no longer working. We are referring to your relationship with your bank. Click here to read how to recognize the red flags in your banking relationship and why it might be a good time to end the bond.

  • 15 Sep 2021
  • ICICI Securities

How Intraday Trading Works? Detailed Ideas

Intraday trading in India has been gaining momentum of late. It is no longer the option of only trade pundits.

  • 15 Sep 2021
  • ICICI Securities

What is Intraday trading? A Beginner's Guide

With the advancement of technology and increased knowledge about the stock market, trading is no more a domain dominated by stock pundits.

  • 05 Sep 2021
  • ICICI Securities

Is it Good To Invest in Cyclical Stocks?

Akin to how the pedals of a cycle go up and down as it moves forward, the share price of certain stocks goes up and down in accordance with the economic cycles a country goes through. 

  • 05 Sep 2021
  • ICICI Securities

A primer on Fixed Maturity Plans

If you happen to have some surplus funds which you don’t need for a specific period, but you don’t want to take the risk of investing this money in the stock market, you can very well put this money in a Fixed Maturity Plan or FMP. 

  • 05 Sep 2021
  • ICICI Securities

How to Choose the Best Equity Mutual Fund

You must have heard a lot about investing in mutual funds. But before jumping on this trend you need to assess a mutual fund scheme according to your goals, investment horizon, risk profile, liquidity needs and many other factors to find a suitable match. 

  • 05 Sep 2021
  • ICICI Securities

A Beginner’s Guide to Monetary Policy Tools

The Reserve Bank of India has the incredibly crucial responsibility to formulate the monetary policy. The main objective of monetary policy is to control inflation and provide a conducive environment for the country's economic growth. 

  • 05 Sep 2021
  • ICICI Securities

Buying Penny Stocks and its Risks

There is a specific category of stocks whose prices are very low and they seem to yield exponential returns. But do you know that investment in such stocks could be risky? 

Open an Account

Sign Up for Free

+91

Please use the mobile no registered with Aadhaar.

OTP sent to +91 1234567890

Didn’t received OTP? Resend

00:30

iciciDirect-money-logo
iciciDirectMoney-App

Get Research Backed Recommendations.

Download The app now

or Scan below QR Code To download app

QRcode