Individuals seek avenues to optimize returns while mitigating risks in finance and investment. Amidst this pursuit, two strategies often find themselves at the forefront of discussions: arbitrage and traditional deposits. Each method harbours merits and demerits, catering to diverse investor preferences and risk appetites. In this discourse, we delve into the nuances of arbitrage and traditional investments, dissecting their pros and cons to illuminate the path for prudent investment decisions.
Arbitrage Funds invest in arbitrage opportunities with a minimum investment of 65% in equity and equity-related instruments. These funds are taxed as Equity Funds. These funds exploit the arbitrage opportunities that exist between the cash and derivatives market as well as within the derivatives segment of the market. Arbitrage strategy simply means simultaneously purchasing and selling the same number of shares in the equity spot market and the equity futures market of the same security to profit from the price difference. When arbitrage opportunities are not available, these funds can also invest up to 35% in short-term debt securities or money market instruments. These funds typically carry Low Risk.
Advantages of Arbitrage Funds
- One of the key advantages of arbitrage funds in India lies in their ability to generate relatively stable returns, irrespective of the broader market direction.
- Capitalizing on price differentials between cash and derivative markets offers these funds a hedged position against market fluctuations, thereby appealing to risk-averse investors.
- Additionally, arbitrage funds in India often boast favourable tax treatment, further enhancing their allure for investors seeking tax-efficient investment avenues.
Disadvantage of Traditional Deposits
While arbitrage funds and traditional deposits are not directly comparable, it is worth noting that arbitrage funds do not guarantee you return. In contrast, your deposits up to 5 lakh are secure in a bank. Traditional deposits offer you guaranteed return whereas mutual funds do not offer guaranteed return.
Traditional investments have their share of drawbacks:
- Traditional deposits may offer low return which does not beat inflation. Inflation reduces your purchasing power. Thus investing in assets which can beat inflation over long run is essential.
- The returns from deposits are taxed at your slab rate while investing in Arbitrage Funds allow you avail long term capital gains tax if your holding period is more than one year.
