Arbitrage Mutual Funds
Arbitrage fund is a type of Hybrid Funds which holds Equity, Debt and Arbitrage opportunities in the market. The price difference between buying and selling price is the return you earn.
Arbitrage fund manager tries to spot opportunities price difference between exchanges.
For example, Equity share of ABC company price is Rs. 100 in National Stock Exchange and the same company share price is Rs. 110 in Bombay Stock Exchange. Fund manager buy these shares in NSE and sell these share in BSE. Here profit is 10.
Arbitrage fund manager tries to predict opportunities in Future Market(Contract within specific expiry).
For example, Equity share of ABC company price is Rs. 100,
Fund manager predict that share will raise Rs 110 within a specific period, then he entered in Future market contract and buy the shares at Rs 100 and sell the shares at Rs 110. Here profit is Rs 10.
Fund manager predict that share will fall Rs 90 within a specific period, then he entered in Future market contract and sell the shares at Rs 100 (without shares in fund portfolio) and buy the shares in Rs 90. Here profit is Rs 10.
- You can consider like a Debt fund and less risk than Equity
- Higher return than Debt fund
- High Expense Ratio.
- Loss when Future market prediction is wrong.
Arbitrage opportunities are not always available quickly and until the opportunities, these funds might stick to debt instruments or cash.