Arbitrage Funds are getting traction lately because of fall in interest rate offered by Debt Funds. Lets critically analyse whether it makes sense to invest in Arbitrage Funds or Ultra Short Term Funds.
What is Arbitrage Fund?
An arbitrage fund rides on the mispricing between the cash markets on the one hand and derivatives markets on the other. The arbitrage opportunities arising out of substantial volatility bring relatively risk-free returns to the investors.
Example – A company’s stock is trading at Rs 100 in the cash market and at Rs 110 in the futures market. So, Rs 10 per share is the profit an investor can make by buying stock in the cash market and simultaneously selling it in the futures market.
Comparison of Arbitrage Funds and Ultra Short-Term Funds (3 Largest funds in both categories):
*As on 18/10/17
- Arbitrage Funds are good if someone is parking money for short term and is in highest tax bracket.
- The return of Arbitrage funds is low and is closer to post tax return of Ultra Short-Term Funds.
- The advantage of Ultra Short Term is that in case they complete 3 years and become long term then tax liability for them falls which enhances their post-tax return.
- Investors in income tax bracket of below 30% should invest in Ultra Short Term Funds
Happy Investing 😊