Crux of Arbitrage Funds

Earning a good lot of money in your life is not all that you should aim at. Your aim should be always to save a considerable amount as well for an emergency period or such situation when you would no more be able to earn for you and your family. Keeping this investor psyche in mind most of the investment products are being designed today. One of the important pockets for investing your money in the mutual fund business is the Arbitrage Fund.

What are arbitrage funds?

The fund that actually makes a profit by buying and selling of securities from the different exchange is only known as Arbitrage fund.  You could easily differentiate between a stock and an arbitrage fund by the fact that stocks are, bought and sold later when the price rises to gain the maximum profit while Arbitrage funds purchase stock in the cash market and simultaneously sells that in the future market.

Benefits

  • It is necessary to execute hundreds of trades every year to make any significant gain from the Arbitrage funds.
  • There are several benefits of Arbitrage funds like they are technically hybrid funds as they can be calculated for tax reduction at capital gains rate which counts much less than ordinary income tax rate.
  • In the case of highly volatile market situation, the Arbitrage funds are the some of the few funds that are of low-risk securities.
  • Since the Arbitrage funds are bought and sold simultaneously, there remains a lower risk of investing in such pockets since there is no space between buying and selling which is there in long term investments.
  • Arbitrage funds profit also from different exchanges stock trading.

Drawbacks

Despite these facts, the arbitrage funds are now in a good crux. The reasons may be jotted as below for your better understanding of the scenario.

  • One of the most important point that made Arbitrage Funds is it being of most mediocre reliability When the markets are stable these type of funds are not very dependable and profitable as well. If there are not an appropriate amount of arbitrage trades present then the fund may turn into a bond fund essentially. In turn, the profitability of the funds falls drastically and in long term, the effectively managed equity funds win over these arbitrage ones.
  • Especially during the most volatile phases of market condition, the Arbitrage funds tend to be the most lucrative investment pocket. At the same time, you can estimate that the successful arbitrage fund management also involves higher expense ratios.
  • You may denote Arbitrage funds as a roller coaster ride as the funds are very much unpredictable in terms of their payoffs despite being one of low-risk investment pockets. Based on your risk tolerance and specific investment goals, money market, bond, the long term stocks may be a more stable option than Arbitrage ones to give you a steady growth opportunity for your saved capital.

From the above discussion, it must be crystal clear to you that the Arbitrage funds are not much suitable for short term investors. Moreover, it should be held for at least one full year to get tax benefits. So, a very planned and scheduled investment scheme is very much required to help things fall in place.

 

Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles by others on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com