Arbitrage Funds – For Risk Averse People to Invest | Best 2 Arbitrage Funds

Arbitrage Funds

Investing in the stock market often comes with a certain degree of risk. However, for risk-averse individuals looking to benefit from market movements without exposing themselves to high volatility, arbitrage funds present an appealing option. Arbitrage funds are mutual funds that aim to take advantage of the price differences between the cash market and the derivatives market, making them a relatively safe investment avenue. This essay explores the concept of arbitrage funds, their benefits, and provides an in-depth analysis of two of the best arbitrage funds available: Kotak Equity Arbitrage Fund Direct Growth and Nippon India Arbitrage Fund Direct Growth.

Understanding Arbitrage Funds

Arbitrage funds exploit the price differences between equity shares in the spot (cash) market and the derivatives (futures) market. Fund managers buy stocks in the cash market and simultaneously sell them in the futures market, locking in the price difference as profit. The price differential, although small, is typically risk-free, as it capitalizes on market inefficiencies. This strategy ensures that the investment remains largely insulated from the typical risks associated with stock market investments, making arbitrage funds ideal for conservative investors.

Benefits of Arbitrage Funds

Arbitrage funds offer several advantages that make them a preferred choice for risk-averse investors:

1. Low Risk: The primary appeal of arbitrage funds lies in their low-risk nature. Since these funds exploit market inefficiencies through simultaneous buy and sell transactions, they are less affected by market volatility.
2. Stable Returns: Arbitrage funds provide relatively stable returns, making them suitable for investors seeking consistent performance. The returns, although modest compared to high-risk investments, are typically higher than those of traditional fixed-income instruments.
3. Tax Efficiency: Arbitrage funds are taxed like equity funds. If held for more than a year, the gains are classified as long-term capital gains (LTCG) and are subject to a lower tax rate. This tax efficiency adds to the attractiveness of arbitrage funds.
4. Liquidity: These funds offer high liquidity, allowing investors to enter and exit the investment easily without significant impact on the fund’s performance.
5. Diversification: Arbitrage funds provide a diversification benefit to an investor’s portfolio. By including arbitrage funds, investors can balance the overall risk of their portfolio.

Also Read… HDFC Mutual Fund – 40% Return in Last 3 Year – SIP With 100 Rs

1) Kotak Equity Arbitrage Fund Direct Growth

One of the prominent arbitrage funds available in the market is the Kotak Equity Arbitrage Fund Direct Growth. This fund has consistently delivered stable returns, making it a reliable choice for conservative investors. Let’s delve deeper into its features and performance.

Key Features

1. Minimum SIP Amount: The minimum Systematic Investment Plan (SIP) amount for this fund is ₹100, making it accessible to a wide range of investors.
2. Fund Returns: The performance of the Kotak Equity Arbitrage Fund over different time horizons is as follows:
   • 1 Year: 8.6%
   • 3 Years: 6.7%
   • 5 Years: 6.0%
   • Since Inception (All): 7.1%

Performance Analysis

The Kotak Equity Arbitrage Fund has demonstrated a robust performance across various time periods. The one-year return of 8.6% is particularly impressive, indicating the fund’s ability to capitalize on market inefficiencies effectively. Over longer periods, the fund has maintained a steady performance, with returns of 6.7% over three years and 6.0% over five years. The overall return since inception stands at 7.1%, showcasing the fund’s consistency and reliability.

Investment Strategy

The investment strategy of the Kotak Equity Arbitrage Fund focuses on identifying arbitrage opportunities in the Indian equity markets. The fund managers employ a disciplined approach to exploit these opportunities, ensuring that the portfolio remains balanced and aligned with the fund’s risk-averse objective. The fund primarily invests in equities, derivatives, and money market instruments, providing a diversified exposure to minimize risk.

Nippon India Arbitrage Fund Direct Growth

Another top-performing arbitrage fund is the Nippon India Arbitrage Fund Direct Growth. This fund is known for its consistent returns and low-risk investment strategy, making it an excellent option for conservative investors.

Key Features

1. Minimum SIP Amount: Similar to the Kotak Equity Arbitrage Fund, the Nippon India Arbitrage Fund also requires a minimum SIP amount of ₹100, ensuring accessibility for all investors.
2. Fund Returns: The performance of the Nippon India Arbitrage Fund over different time horizons is as follows:
   • 1 Year: 8.4%
   • 3 Years: 6.5%
   • 5 Years: 6.0%
   • Since Inception (All): 7.1%

Performance Analysis

The Nippon India Arbitrage Fund has delivered solid performance metrics, with a one-year return of 8.4%. Over three and five years, the fund has generated returns of 6.5% and 6.0%, respectively. The overall return since inception matches that of the Kotak Equity Arbitrage Fund at 7.1%, highlighting the fund’s ability to provide consistent and reliable returns over the long term.

Investment Strategy

The investment strategy of the Nippon India Arbitrage Fund is focused on leveraging arbitrage opportunities in the equity and derivatives markets. The fund managers employ a rigorous and systematic approach to identify and exploit these opportunities, ensuring that the portfolio remains optimized for low-risk returns. The fund invests in a mix of equities, derivatives, and debt instruments to achieve its investment objectives.

Comparative Analysis

When comparing the Kotak Equity Arbitrage Fund and the Nippon India Arbitrage Fund, both funds exhibit similar characteristics and performance metrics. Both funds require a minimum SIP amount of ₹100, making them accessible to a broad spectrum of investors. Additionally, the returns over different time periods are comparable, with both funds delivering consistent performance since inception.

1. One-Year Return: Kotak Equity Arbitrage Fund leads slightly with 8.6% compared to Nippon India Arbitrage Fund’s 8.4%.
2. Three-Year Return: Kotak Equity Arbitrage Fund has a slight edge with 6.7% over Nippon India Arbitrage Fund’s 6.5%.
3. Five-Year Return: Both funds perform equally well with returns of 6.0%.
4. Since Inception: Both funds have a consistent return of 7.1%.

The marginal differences in returns suggest that both funds are equally competent in their investment strategies. However, individual preferences, risk tolerance, and specific financial goals should guide investors in choosing between the two.

Conclusion

Arbitrage funds present an excellent investment opportunity for risk-averse individuals seeking stable and consistent returns. The Kotak Equity Arbitrage Fund Direct Growth and the Nippon India Arbitrage Fund Direct Growth are two of the best options available in this category. Both funds have demonstrated robust performance over various time periods, offering low-risk and tax-efficient returns.

Disclaimer

The information provided in this essay is for informational purposes only and should not be construed as financial advice. While efforts have been made to ensure the accuracy and reliability of the content, the author and publisher do not guarantee its completeness or suitability for any particular purpose. Investors are advised to conduct their own research and consult with a qualified financial advisor before making any investment decisions.

The performance data and fund details mentioned in the essay are based on publicly available information and may be subject to change. The author and publisher disclaim any liability for any direct or indirect losses incurred by using the information provided in this essay. Past performance is not indicative of future results, and all investments carry inherent risks.