Arbitrage funds take advantage of changing prices of securities trading between different stock exchange.
When a particular equity trades on two different exchanges, there can be mispricing between the two due to economic volatility. An arbitrage fund works on the mispricing of such stocks in the spot and futures market. The price differences between the current and future security contracts generate maximum possible returns in an arbitrage fund. For Example: The fund manager simultaneously purchases equity in the cash market and sells it in futures/derivatives market. The difference in the cost price and the selling price is the return earned by the fund manager.
A fund manager speculates the price of an equity in the cash and futures/options market. Say, a stock trades at Rs. 1,000 in the cash market while the same stock is for Rs. 1,100 in the futures market. The fund manager will purchase the shares at a lower price from the cash market and sorts a futures contract to sell the shares at Rs. 1,100. When the prices coincides in the future, the fund manager will sell the shares in the futures market and generate a risk-free profit of Rs. 100 less than transaction costs. As an alternative option - the fund manager speculates the price to fall in the future, he/she will enter into a long contract in the futures market and short sell the shares in the cash market at Rs. 1,100. Post the expiry date, the fund manager will buy the shares in the futures market at Rs. 1,000 to cover his position to earn a profit of Rs. 100.
Arbitrage funds are suitable for investors looking for equity exposure with a low risk-appetite. An arbitrage fund makes profit low-risk buy-and-sell opportunities in the cash and futures market. Such funds follow CRISIL BSE 0.23% Liquid Fund Index as their benchmark as their risk level is at par with pure debt funds.
The key features of arbitrage funds are:
Here are the top 5 arbitrage funds in India:
| Investment Objective | To generate income by taking advantage of the arbitrage opportunities that potentially exists between cash and derivative market and within the derivative segment along with investments in debt securities & money market instruments |
| Type | Hybrid: Arbitrage |
| Benchmark | Nifty 50 |
| AUM | Rs. 10223.57 Cr |
| Fund Manager | Anand Devendra Gupta |
| Return Rate 1 Yr | 6.28% |
| Return Rate 3 Yrs | 6.27% |
| Return Rate 5 Yrs | 6.64% |
| Investment Objective | To generate capital appreciation and income by predominantly investing in arbitrage opportunities in the cash and derivatives segment of the equity market, and by investing the balance in debt and money market instruments |
| Type | Hybrid: Arbitrage |
| Benchmark | Nifty 50 |
| AUM | Rs. 17362.55 Cr |
| Fund Manager | Rukun Tarachandani , Hiten Shah |
| Return Rate 1 Yr | 6.19% |
| Return Rate 3 Yrs | 6.16% |
| Return Rate 5 Yrs | 6.50% |
| Investment Objective | To generate income by predominantly investing in arbitrage opportunities in the cash and derivative segments of the equity markets and the arbitrage opportunities available within the derivative segment and by investing the balance in debt and money market instruments |
| Type | Hybrid: Arbitrage |
| Benchmark | Nifty 50 |
| AUM | Rs. 3879.13 Cr |
| Fund Manager | Dhawal Dalal, Bhavesh Jain |
| Return Rate 1 Yr | 6.26% |
| Return Rate 3 Yrs | 6.15% |
| Return Rate 5 Yrs | 6.59% |
| Investment Objective | To generate capital appreciation through arbitrage opportunities between cash and derivative market and arbitrage opportunities within the derivative segment and by deployment of surplus cash in debt securities and money market instruments. However, there can be no assurance or guarantee that the investment objective of the scheme would be achieved |
| Type | Hybrid: Arbitrage |
| Benchmark | Nifty 50 |
| AUM | Rs. 3251.71 |
| Fund Manager | Rajeev Gupta, Amit Sharma |
| Return Rate 1 Yr | 6.31% |
| Return Rate 3 Yrs | 6.11% |
| Return Rate 5 Yrs | 6.44% |
| Investment Objective | To generate reasonable returns by predominantly investing in arbitrage opportunities in the cash and derivatives segments of the equity markets and by investing the balance in debt and money market instruments |
| Type | Hybrid: Arbitrage |
| Benchmark | Nifty 50 |
| AUM | Rs. 772.75 |
| Fund Manager | Alok Ranjan, Venugopal M, Praveen Ayathan, Jalpan Shah |
| Return Rate 1 Yr | 6.11% |
| Return Rate 3 Yrs | 6.04% |
| Return Rate 5 Yrs | 6.43% |
Arbitrage funds are considered a suitable investment option. It is advisable to keep one arbitrage fund in your investment portfolio.
