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What is Arbitrage Funds Mutual Fund?
Arbitrage mutual funds seek to take the benefit of arbitrage opportunities to deliver capital appreciation at a little or no risk. The fund manager of arbitrage funds takes advantage of the price difference of an instrument to gain decent capital gains. These funds offer low risk and generate average returns hence they are suitable for conservative investors who seek capital appreciation in short-term at low risk.
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These funds invest at least 80% of their assets in the top 100 companies by market capitalization. These funds invest at least 80% of their assets in the top 100 companies by market capitalization.Having Confusion in Selecting a Fund..?
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Arbitrage Funds
Arbitrage Funds sounds to be some sort of very complicated type of mutual fund. But, the reality is something different. It is actually very easy to Arbitrage Funds understand and invest. The basic idea behind the launch of Arbitrage mutual funds, was to introduce such an equity fund which will earn the profits from the different prices of the same commodity. The Arbitrage and Arbitrage Plus mutual funds buy in the shares in cash from the equity market and sell them in the future market. Both the processes work simultaneously. Implying that as and when the equity shares are bought firm the share market under Arbitrage Funds at the same time they are sold to in the future market. The difference between Arbitrage mutual funds is that in Arbitrage MF all shares bought from the capital market is resold in the futures market. But, in Arbitrage Plus Mutual Fund all the equity shares are not sold in the futures market. Apart from this difference there is no other difference in both the funds.
Let us understand the meaning of Arbitrage and Arbitrage Plus mutual funds with the help of a simple example. Suppose, the AMC (Asset Management Company) providing Arbitrage and Arbitrage Plus mutual funds intends to invest in the equity shares of ABC Ltd. The per share price of the company in the equity market is Rs. 500 and that in the future market is Rs. 520. The fund managers of Arbitrage and Arbitrage Plus mutual funds for the AMC will buy the shares of ABC Ltd. and simultaneously sell them in the futures market. The reason of preferring Arbitrage and Arbitrage Plus mutual funds over debt funds and equity funds is that you get the benefit of both the schemes in one single fund.
Arbitrage and Arbitrage Plus mutual funds share negligible risk as the equities are bought and sold simultaneously. Only Arbitrage mutual fund keeps some equities unsold and share a little risk but that too, very low. On the other hand, the Arbitrage and Arbitrage Plus mutual funds deal in equity shares so the returns are not fixed. They fluctuate with the bullish or bearish market conditions. Thus, they provide the scope for returns which are not stagnant.
The Arbitrage Funds have many advantages over debt funds and equity-based funds. They are as follows:
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