These funds profit from stock price differences. Let's say a stock is Rs 500 on the BSE and Rs 505 on the NSE. The fund can buy from BSE and sell it on NSE for a Rs 5 profit.
Also, there may be a difference between its current and future prices. Suppose a stock is Rs 200, but the futures market has it at Rs 210. The fund can make Rs 10 in this case.
Typically, investors keep their short-term or emergency money in liquid funds, but arbitrage funds are proving to be an alternative.
In fact, these funds have been drawing sizable investor attention in recent months. They witnessed high net inflows – Rs 91,114 crore – in the first 11 months of FY24.
Let’s explore the reasons why these funds have become popular among high net-worth individuals.
Over the last 12 months, an average arbitrage fund has delivered 7.33 per cent returns compared to liquid funds’ 7.07 per cent.
Arbitrage funds are more tax-friendly than liquid funds because they are treated like equity-oriented funds.
These funds do well when the markets are in a positive zone or during a high activity period, as they generally were in the last financial year.
Are they really a healthy alternative to liquid funds? Should you invest in them instead? You can find out by clicking the link below and checking the 'Our take' section.