5 Best Arbitrage mutual funds give high returns in India 2022

5 Best Arbitrage mutual funds give high returns in India 2022

Arbitrage is a strategy that takes advantage of price differences in different markets to generate profits. Arbitrage funds are named after the arbitrage strategy they use.

They are a type of Mutual Fund that takes advantage of the price difference to generate returns. The returns of these funds depend on the volatility of the asset invested in the market. They use market inefficiencies to generate returns for their investors.

5 Best Arbitrage mutual funds give high returns in India

Taking advantage of uneven prices is the central idea of ​​arbitrage funds. Arbitrage funds use low-risk buy and sell opportunities to optimize returns.

For example, shares of XYZ Company Ltd. are trading at Rs.500 each in the cash market and Rs.1,000 on the futures market. Buying shares in the cash market and selling the shares in the futures market makes a profit of Rs 500 per share.

Why should you invest in Arbitrage Funds?

Negligible risk

Arbitrage funds are not 100% risk-free, but they carry negligible risk. At the wrong price getting in the Wayback markets. It gives the investor a safer option than other short-term funds as these funds give better returns during market volatility.

Return

These funds generally give returns around 7-9% of the amount invested. It is more in comparison to liquid funds or short-term debt funds. Thus, making arbitrage funds an attractive investment option.

Favorable taxation

One of the huge advantages of investing in these funds is the tax treatment. Equity funds attract long-term capital gains. If profit is INR 1 Lakh, then it comes under tax-free. Profit above INR 1 lakh is taxed at the rate of 10%.

Research the fund

Before investing in the fund, read its past returns, minimum investment required, and its strategies. Most of the arbitrage funds in India follow a pure arbitrage strategy.

But these funds are known to follow strategies like merger/risk arbitrage (speculation on successful completion of mergers and acquisitions) etc., which are a bit complicated to understand for the layman. Therefore, it is necessary to get an idea of ​​the fund’s strategy before investing to know what you are getting into.

Check exit load policy

Premature withdrawals from arbitrage funds usually attract a penalty or exit load of 0.25-0.5%. Check the exit load policy of your fund before investing to avoid unwanted penalties.

Risks of Investing in Arbitrage Mutual Funds India

lack of diversification

Arbitrage funds are required to maintain at least 65% of their capital in equity. It affects the diversification of the fund as they cannot invest much in debt funds, thus affecting the overall portfolio of the investor,

Exit load

As stated earlier, these funds charge an exit load on premature withdrawal. It can range anywhere from 0.25-0.50%. It will also take some 1-3 working days in redemption money. It affects the liquidity of the fund.

Not suitable for long term

Arbitrage funds are not an attractive option for long-term wealth creation. Since the arbitrage opportunities are limited, there is only a small window for making profits. Because of their strategy, they do not have high growth potential. Thus, making him ill for a long time.

1- SBI Arbitrage Opportunities mutual Fund

Investors who want to earn returns/profits with less time tax exemption as compared to liquid and debt funds. He can invest in SBI Arbitrage Opportunities Fund.

  • Rating — 2 Stars
  • Risk — Moderately low
  • Expanse Ratio — 0.9
  • Sharpe Ratio — 0.76
  • Alpha Ratio — 0
  • Minimum SIP Ratio — 500
  • Minimum — 5000
  • Returns — 6.8%

2. Kotak Equity Arbitrage Fund

This fund invests in equity and equity-related instruments as well as in debt and fixed income instruments. This fund earns good returns through futures-market contracts.

  • Rating — 4 Star
  • Risk — Moderately low
  • Expanse Ratio — 0.68
  • Sharpe Ratio — 1.03
  • Minimum SIP Ratio — 500
  • Minimum investment — 5000
  • Returns — 4 %

3- UTI Arbitrage Fund

It invests primarily in equities and derivatives, balancing debt and money markets. Like all arbitrage funds, it also makes a profit from futures market contracts.

  • Rating — 3 Star
  • Risk — Moderately low
  • Expanse Ratio — 0.93
  • Sharpe Ratio — 0.72
  • Minimum SIP Ratio — 500
  • Minimum investment — 5000
  • Returns — 3.9 %

4. Nippon India Arbitrage Fund

The objective of the scheme is to earn profit and income on price differences in cash and futures markets through arbitrage opportunities.

  • Rating — 4 Star
  • Risk — Moderately low
  • Expanse Ratio — 1.02 %
  • Sharpe Ratio — 0.74%
  • Minimum SIP Ratio — 500
  • Minimum investment — 5000
  • Returns — 3.8 %

5. Axis Arbitrage Fund

It is a type of equity fund, which earns good returns through futures-market contracts during market volatility.

This fund invests the outstanding amount in cash and money market instruments to buy/sell water shares at the earliest so that the money can be easily withdrawn when needed.

  • Rating — 2 Star
  • Risk — Moderate
  • Expanse Ratio — 1.05 %
  • Sharpe Ratio — 0.81%
  • Minimum SIP Ratio — 1000
  • Minimum investment — 5000
  • Returns — 3.8 %

Important Notes

1. Risk 

These funds do not involve any counterparty risk. Even though the fund manager is buying and selling shares in the cash and futures markets, equity does not carry any risk, as is the case with other diversified equity Arbitrage mutual funds India.

Though the journey sounds easy, don’t get too comfortable with these funds. More people start trading in arbitrage funds, there will be no more arbitrage opportunities available. The spread between cash and futures market prices will narrow, leaving little for arbitrage-focused investors.

2. Return

Arbitrage funds can be a good opportunity to deliver reasonable returns for those who can understand it and then make the most of it. The fund manager tries to generate a using price difference in the alpha markets. Historically, arbitrage funds have been found to deliver returns in the range of 7%-8% over 5-10 years.

If you are looking to earn moderate returns through a portfolio that has the right mix of debt and equity in a volatile market, then arbitrage funds may be your thing. 

3. Cost

Cost becomes an important consideration when valuing an arbitrage fund. It includes the fund manager’s fee and fund management fee. Due to frequent trading, arbitrage funds will incur huge transaction costs and have a high turnover ratio.

Additionally, the fund may levy an exit load for a period of 30 to 60 days to discourage investors from exiting early. All of these costs can increase the fund’s expense ratio. A high expense ratio puts downward pressure on your take-home return.

5. Financial Goals 

If you have short to medium-term financial goals, then arbitrage funds are your thing. Instead of a regular savings bank account, you can use these funds to build an emergency fund and park the extra money to earn higher returns on them.

If you have already invested in risky haven equity funds, you can start a Systematic Transfer Plan (STP) as you move closer to meeting the financial goal.

It will reduce the overall risk profile of your portfolio but at the same time reduce the returns. You cannot expect to earn double-digit returns in arbitrage mutual funds India.

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