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, former Manager at Reliance Industries Limited (2013-2017)

Arbitrage fund is a type ofequity mutual fund, takes advantage of differential pricing between the cash and futures (derivatives) markets to generate return on investment, as long as the derivatives are trading at decent premium.

To understand this, consider a firms share is trading at ₹100 in cash market and ₹120 in the derivative market. So, you can make profit by buying the share in cash market and sell it in derivatives market. This mispricing is the crux of arbitrage fund. The fund managers here reduce the risk of equities by hedging against the derivatives.

Fund manager in arbitrage funds, reduce the risk of stocks by hedging against the derivatives

These funds hold more than 65% investment in equity

These funds are safe and bring almost risk-free returns to the investors as compared to other equity based instruments. Good option for investors with low risk appetite.

Rides on market inefficiencies and volatility to capture good return for the investors. More the market wobble more the mispricing and hence more will be the returns.

Returns on investing in arbitrage funds is around 6-9%.

If the funds are hold over 1 year, returns from these funds are tax free.

The dividends on these funds are also tax free.

So, an arbitrage is best investment option in highly volatile and unstable stock market to capture rich dividends and returns. But being equity based, they involve certain amount risk.Growwhelps you to select right mutual fund as per your risk appetite and investment goals.

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Are arbitrage funds very safe compared to any other equity-oriented mutual funds?