Level | Advanced

What are arbitrage funds? Who should invest in these funds?

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Key Takeaways

  • Due to investor sentiment, the price of the same security may differ between markets.
  • Arbitrage can help you capitalize on this dual pricing opportunity.
  • Arbitrage funds undertake arbitrage trading between cash and futures or between two stock exchanges (S&P BSE and NSE) to make profits.
  • These funds are considered to be low risk since they don’t hold stock.
  • Even though arbitrage funds are comparable to debt funds in terms of safety, they are treated as equity funds for taxation purposes.
  • If you are looking for safety in your investments and, at the same time, want to invest in securities beyond debt, arbitrage funds are for you.
  • Arbitrage funds do well when stock markets are volatile.
  • When choosing a suitable arbitrage fund in which to invest, select a fund that has a decent corpus size, low expense ratio and experienced fund manager.