How arbitrage funds help in building a resilient portfolio

Financial market investments can be a rollercoaster ride, with several highs and lows. A resilient portfolio is essential for weathering these fluctuations and potentially achieving long-term financial goals. Arbitrage funds offer an opportunity to potentially enhance portfolio resilience through their distinct investment approach.

In this article, we'll explore how arbitrage funds can contribute to building a potentially resilient portfolio and provide insights into considerations for investing in them.

• Table of contents

1. How arbitrage funds work
2. Understanding resilient portfolios in arbitrage funds
3. Here's how arbitrage funds contribute to building a resilient portfolio
4. Tips to build a resilient portfolio with arbitrage fund

How arbitrage funds work

Arbitrage funds are hybrid funds that capitalise on price differentials in various markets to generate potential returns with relatively low risk. Arbitrage trade involves the simultaneous buying and selling of securities, commodities, or currencies that are valued differently in different markets or exchanges. For instance, an arbitrage trade could involve buying a stock at a low price on the spot market and selling it higher on the futures market. This helps such funds potentially take advantage of market volatilities and brief price inefficiencies.

Understanding resilient portfolios in arbitrage funds

A resilient portfolio can potentially withstand market volatility and economic uncertainties while maintaining its potential to generate returns over the long term. Resilience in a portfolio comes from diversification, risk management, and the ability to adapt to changing market conditions. Arbitrage funds are one of the few investment avenues that can benefit from market volatility.

Here's how arbitrage funds contribute to building a resilient portfolio

Relatively lower risk

Arbitrage opportunities typically involve low risk because they exploit price differentials between markets through simultaneous trades and typically benefit from volatility. Since arbitrage investors aim to capture small gains quickly, they minimise exposure to market fluctuations. This makes these funds suitable for investors seeking mitigated impact on capital invested and a steady return potential.

Diversification

Including arbitrage funds in a portfolio adds diversification benefits. These funds often have low correlation with traditional equity and bond investments, thus mitigating overall portfolio volatility. By diversifying across asset classes, investors can spread risk and potentially enhance portfolio resilience.

Steady returns

Arbitrage strategies aim to generate a consistent, albeit modest, return potential regardless of market direction. During market downturns or volatility, arbitrage funds can provide a stable return potential, helping investors stay on track towards their financial goals.

Tips to build a resilient portfolio with arbitrage fund

When considering investing in arbitrage funds, here are some important factors to keep in mind:

Understand the strategy

Take the time to understand how arbitrage funds work and their investment approach. While arbitrage opportunities offer relatively low risk, it's essential to grasp the mechanics of arbitrage trading and the factors that can affect returns.

Assess risk tolerance and investment goals

Determine whether arbitrage funds align with your risk tolerance and investment objectives. While they offer relative stability and low volatility, the return potential may be lower compared to more aggressive investment options.

Evaluate fund performance

Research and compare the performance of different arbitrage funds before making investment decisions. Look for funds with a consistent track record of outperforming or delivering steady returns in line with their benchmark and when compared to their peers.

Consider tax implications

Arbitrage funds are treated as equity funds for taxation purposes, so they are taxed at 15% if held for less than one year, and 10% thereafter. Consider the tax implications and consult with a financial advisor to optimise your tax strategy.

Conclusion

Arbitrage funds can play a significant role in building a resilient portfolio by offering relatively low-risk investment options with the potential for steady returns. By capitalising on price differentials in various markets, arbitrage funds provide diversification benefits and can help investors handle market volatility. However, it's essential to assess your risk tolerance, understand the investment strategy, and consider tax implications before investing in arbitrage funds. With careful planning and diversification, arbitrage funds can contribute to a resilient portfolio that can potentially withstand market uncertainties and contribute to your long-term financial success.

FAQs

Are arbitrage funds suitable for all types of investors?

Arbitrage funds are generally suitable for investors seeking low-risk investment options with the potential for steady returns. However, investors should assess their risk tolerance and investment objectives before investing in arbitrage funds.

How do arbitrage funds generate returns?

Arbitrage funds seek to capitalise on price differentials in various markets by simultaneously buying and selling securities, commodities, or currencies. These funds exploit temporary mispricings to potentially capture small profits quickly, generating a return potential with relatively lower risk.

How do arbitrage funds perform during market downturns?

Arbitrage funds typically perform well during periods of volatility because they focus on exploiting price differentials rather than market direction. Their low-risk approach and ability to generate steady returns make them attractive options for investors seeking relative stability during turbulent market conditions.

Are there any tax implications associated with investing in arbitrage funds?

Yes, arbitrage funds are taxed like equity funds, which means investors are subject to short-term capital gains tax of 15% if they hold their investments for less than a year and a long-term gains tax of 10% when held for more than a year.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.