Why Arbitrage Funds Is Preferred Over Fixed Income Funds?

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oi-Shubham Kumar

| Updated: Monday, January 10, 2022, 11:47 [IST]

For an investor Fixed income fund with a high-interest rate is always preferred. When it comes to investing fixed income funds such as Fixed Deposits (FDs) are preferred, however, these days FDs don’t have the high-interest rate they use to be in the pre-COVID-19 era. Mutual funds and stocks are now the most promising investment destination that offers a better return on investment compared to FDs or Fixed Income Funds. However, the risk involved is much higher and the investment is risky at all levels.

What are Arbitrage funds?

Arbitrage funds are a type of mutual fund investment that generates profits by exploiting the mispricing of equity shares in the spot and futures markets. To create maximum profits, it mostly takes advantage of price disparities between present and future securities. The fund manager buys shares in the cash market and sells them in the derivatives or futures markets at the same time. The return you get is the difference between the cost price and the selling price.

How do Arbitrage funds generate profit?

The trader often buys assets from the stock market and sells them at a higher price in the future market, profiting from the transaction. Arbitrage funds invest in money market and short-term debt instruments since they are equity-oriented hybrid funds. As a result, it is clear that arbitrage funds outperform other equity-oriented hybrid funds when the market is volatile. When the market is less volatile, though, low-risk debt funds are a better option. Fixed income funds are outperformed by arbitrage funds in terms of returns and tax efficiency. Arbitrage funds would be an appropriate destination for short-term excess investments of three to six months.

Arbitrage funds Vs Fixed Deposits (Fixed Income) – An Overview

In comparison to Fixed Deposits, Arbitrage funds are more riskier, however, returns are good but not guaranteed return. Whereas, Fixed deposits provide guaranteed returns that have been pre-declared. The returns on arbitrage funds are market-dependent. In case, the investor withdraws prematurely from both Arbitrage funds and FDs, the investor will be charged a penalty. However, if the investor has redeemed the arbitrage fund within 1 or 2 months or 30-60 days of purchase, he may be charged an exit load. Fixed deposit investors, on the other hand, may be subject to a penalty if they withdraw their money early, which is determined by the bank.

Which investment is better for investments?

An investor can choose anyone for investment, however, a comparison between these two is recommended. AN investor chooses the one that fulfills his or her investment requirements over the other. An investor must first determine their requirements before comparing arbitrage funds to fixed deposits. A high-interest rate is offered by an arbitrage fund. However, it is dangerous in turbulent markets, and returns are not guaranteed. Until the maturity date, a fixed deposit pays a greater interest rate to investors. However, depending on the depositing institution, you may be required to pay a penalty for early withdrawals. To simplify your investing, an investor can pick between two types of investment products or both if he or she has reasonable capital to invest.

Disclaimer

Investments are subject to market risk. Read all documents and scheme-related conditions carefully before investing. The above-mentioned information is purely informational. The Greynium Information Technologies and the author are not liable for any losses caused as a result of a decision based on the article.

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