Recently, I came to know that arbitrage funds have given good returns in 2008. Is it advisable to invest in arbitrage funds in volatile markets?
- Nikhil Mahajan
Yes, arbitrage funds have generated 8.5 per cent on an average in 2008 while all other equity funds ended up with negative returns.
Arbitrage Funds aim to capitalize on the opportunities arising from a pricing mismatch between the spot and the future markets. They constitute an asset class whose returns are not linked to the stock market. Their strategy to profit from the difference between the prices of a stock in different markets makes them immune to upswings and downswings of the stock market. They are undoubtedly less risky as compared to equity funds.
These funds are suitable for risk-averse investors as they are the least volatile in comparison to all other types of funds. Moreover, these funds are more tax efficient than debt funds as they are treated in line with equity funds. The performance of arbitrage funds depends on the availability of arbitrage opportunities and volatile markets carry a higher potential of mis-pricing between the spot and derivatives markets. Hence, during such volatile times they form a good option to invest in.