Check why arbitrage funds are better alternatives than fixed deposits - CNBC TV18 (2024)

FAQs

Is arbitrage fund better than fixed deposit? ›

The returns from arbitrage funds are typically in the range of 6-8% per annum, which is significantly higher than the interest rates offered by banks on fixed deposits.

One of the benefits of arbitrage funds is that they are moderately low risk. Because each security is bought and sold simultaneously, there is virtually no counterparty risk. The clearinghouse guarantees that the futures contract will be honored therefore eliminating counterparty risk.

In fact, between December 2023 and February 2024 alone, these funds saw net inflows of around Rs 32,761 crore. Higher returns, favourable tax structure, interest rate uncertainty and a buoyant equity market are some of the reasons why investors, especially the high-ballers, are opting for arbitrage funds.

However, a new market player, arbitrage funds, has been gaining traction as a potential alternative to liquid funds. These funds have been touted for their ability to provide stable returns while also offering the potential for higher yields.

Arbitrage helps in making the financial markets more efficient and robust. Now for example, if there were no arbitrageurs in the markets then stocks would have kept trading at different prices in different markets. This would put a handful of traders at an unfair advantage.

Key Takeaways. Arbitrage is the simultaneous purchase and sale of an asset in different markets to exploit tiny differences in their prices. Arbitrage trades are made in stocks, commodities, and currencies. Arbitrage takes advantage of the inevitable inefficiencies in markets.

Arbitrage funds typically have a minimal amount of risk for the investor. Because each security is bought and sold at the same time, there is essentially no risk associated with longer-term investments.

Bearish or Rangebound markets – In bearish or range-bound markets, arbitrage opportunities dry up and an arbitrage fund may have to stay invested in debt or hold cash. Also, when the market sentiment is bearish, futures may trade at a discount (and not a premium) to the cash market implying negative spreads.

Arbitrage is like a secret way to make money in the financial world. It's about finding opportunities when prices are not quite right and making a profit from them. Whether it's through spatial, temporal, statistical, merger, risk, or convertible arbitrage, people quietly use these strategies to make money.

Which is better arbitrage fund or liquid fund? ›

The returns from liquid and arbitrage funds may be similar over the long term. Arbitrage funds may generate relatively better returns than liquid funds, but liquid funds tend to be relatively stable and consistent when generating returns for investors.

Arbitrage has been a preferred category for shorter term funds, as arbitrage funds have done well with buoyant equity markets and high F&O volumes, better participation from Retail HNIs in F&Os adding stability in arbitrage yields. Also, tax efficiency of arbitrage funds for HNIs is a big pull factor in these funds.

Potential for steady returns: By capitalising on price differences, arbitrage funds can offer steady returns, even in volatile markets. This makes them a good option for investors seeking stability in their portfolio. Tax advantages: Similar to equity funds, arbitrage funds benefit from tax advantages.

The main difference between an Arbitrage Fund and a Fixed Deposit (FD) is that arbitrage funds, being market-linked, offer potentially higher returns but with more risk. On the other hand. FDs provide stable, lower returns with minimal risk and are not influenced by market fluctuations.

Fund Performance: The Invesco India Arbitrage Fund has given 6.68% annualized returns in the past three years and 6.11% in the last 5 years. The Invesco India Arbitrage Fund comes under the Hybrid category of Invesco Mutual Funds.

One of the primary disadvantages of arbitrage funds is their mediocre reliability. As noted above, arbitrage funds are not very profitable during stable markets. If there are not enough profitable arbitrage trades available, the fund may essentially become a bond fund, albeit temporarily.

Higher Returns Than FDs: Mutual funds (especially equity funds) can provide better returns than FDs over the long term. Professional Management: Fund managers actively manage the portfolios of mutual funds.

While on a 3 month basis there are no instances of negative returns in arbitrage funds, to be on the conservative side we would suggest a minimum time frame of atleast 6 months. If you can hold and extend your time frame by more than 1 year then you also get the benefit of long-term capital gains tax.

The returns from liquid and arbitrage funds may be similar over the long term. Arbitrage funds may generate relatively better returns than liquid funds, but liquid funds tend to be relatively stable and consistent when generating returns for investors.