Why Arbitrage Funds Are Attractive For Conservative Investors

The markets are trading at lifetime high seas but many investors are jittery and are hesitant to invest in the present market. Historical e equity funds have delivered above-average returns and will continue to remain the best asset class. However, equity investments are volatile and one should always and sure of the safety of their investments during volatile times. 

If you find present levels of the markets quite high and fear volatility you can invest in arbitrage funds. The objective of the arbitrage fund is to preserve capital while delivering modest returns on capital invested. Arbitrage funds invest an equal portion of equity and futures. For example, if the fund buys 1000 shares of X company encash market it sells the same number of shares in the futures market. They also invest up to 35% in debt. This strategy ensures that if there are no arbitrage opportunities present in the equities they can generate the income from the debt investments. 


Arbitrage funds make money by capitalizing on the price differential between the cash and futures markets. Typically arbitrage fund delivers between 6 to 8% return per year which is higher than the traditional fixed deposits. Since they are equity-oriented the investor also gets the advantage of taxation in the form of long-term capital gains tax (if the investments are held for more than one year). 

The very fact that the arbitrage funds do not depend on the valuations of the market makes them attractive for the conservative investor. The return on arbitrage funds can easily beat the fixed deposits. These funds are the best bet for investors in volatile markets. 

What makes arbitrage funds safe? 

As mentioned earlier arbitrage funds buy in cash and sell in futures. Normal market the price of futures trades higher than the spot rates. During the futures expiry, the price of spot price and futures price converge. the rivers happen during the volatile markets when the futures trade below spot price the arbitrage funds short sell the shares encash and by the futures. Thus the arbitrage funds make money on the price differential between spot and futures price. 

Arbitrage funds are ideal for those investors who have a very low-risk appetite. Since the markets are imperfect there are plenty of opportunities for arbitrage funds to operate. Like all investments investing in arbitrage funds also require Sun knowledge hence it is always advisable to consult your financial advisor to protect your hard-earned money. 

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