scorecardresearchCan arbitrage mutual funds give you the stability you need in this volatile market?

Can arbitrage mutual funds give you the stability you need in this volatile market?

Updated: 17 May 2022, 02:30 PM IST
TL;DR.
It may be bold to invest in equity funds and a bit drab to park money in debt funds. Investors with the least preference for volatility while aiming for constantly positive returns may park their earnings in arbitrage funds that rely on the conventional method of buying low in one market and selling at high in another. 
Investments in arbitrage funds have been giving out positive returns almost every year, thus, explaining their relatively stable nature compared to equity and debt funds.

Investments in arbitrage funds have been giving out positive returns almost every year, thus, explaining their relatively stable nature compared to equity and debt funds.

In the melee of stock movement amid the market volatility, it seems that only those who had invested in arbitrage funds witnessed the bulls running in their favour. For the unversed, arbitrage funds earn risk-free profits by buying stocks at a lower price from one exchange and selling them at a higher price on another exchange. This is however possible when the price of the same stock or commodity varies across different markets.

Arbitrage funds do not yield too high returns, though the same is preferred owing to the inherent risk-free component in them. You can either buy shares in the cash market and sell them at a higher price in another cash market. Alternately, you can consider buying in the cash market and selling the same in the Future & Options market. This way you can earn profits irrespective of the price movement of the security.

Why invest in arbitrage funds?

If you are still wondering why many people invest in arbitrage funds, a look at the following benefits will help.

Stable performance over the years

You look at the arbitrage funds and will realize how many of them have earned returns up to six per cent in the past year despite the constant market fluctuations synonymous with bears overpowering the bulls. The prices of shares have dropped down to below 30 per cent though this did not affect arbitrage fund companies from earning profits for their investors.

Name of the fund1-year returns3-year returns5-year returns
Nippon India Arbitrage Fund - Direct Plan-Growth4.62%5.13%5.92%
Edelweiss Arbitrage Fund - Direct Plan-Growth4.76%5.28%5.91%
Kotak Equity Arbitrage Fund - Direct Plan-Growth4.67%5.07%5.77%
Invesco India Arbitrage Fund - Direct Plan-Growth4.71%5.11%5.68%

Opportunities galore

There is no dearth of opportunities for arbitrage funds to make profits. For example, when the market is experiencing a bull run, the futures are higher than the cash, thus, lending an opportunity to buy the stock from the cash market and sell futures of the stock in the derivatives market. In the current volatile market, traders are finding a lot of opportunities to churn out profits from the purchase and sell of stocks across various markets owing to the high difference in pricing across both the markets. In a market where everyone is earning profits, investing in arbitrage funds will yield you decent profits. The extent of profits is more in a constantly undulating market.

A better alternative to debt funds

Investors turn to debt funds when they are seeking stability. The volatility of the market scares them off, thus, leaving many of them to be content with whatever meagre profits they earn from debt funds. Most people do not realize that they must compare the post-tax returns from debt funds and arbitrage funds before deciding where to invest.

Hedge against inflation

Arbitrage funds do not do well in stable markets. However, in markets reeling under inflation, arbitrage fund managers tend to adopt aggressive strategies and positions including short selling, trading in derivative instruments like options, and using leverage (borrowing) to increase the chances of earning profits.

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Benchmarking mutual funds
First Published: 17 May 2022, 02:30 PM IST