The market situation is highly uncertain currently and these are very tricky times for investors. Some investors stay put at such time while some withdraw most of their investments. There are even some who buy stocks when they have fallen and then hold them for a long time. When you see an investment option is providing you good returns, more often than not, those options come with high risks. This risk factors rise while the market is unstable. Arbitrage funds are the best option for these times. Arbitrage funds have a history of performing well in uncertain market conditions.
Sometimes, a particular security or commodity comes with different prices in different markets. Arbitrage funds work with this difference of price. A particular stock comes with different buy and future sell prices from different stock markets. The arbitrage funds can gain good returns, without risk, by buying the stock from lower priced market and save them to sell in the future in a market which gives a higher price.
This practice allows arbitrage fund managers to gain even in the most unstable market, making arbitrage funds the safest bet in uncertain situations. They offer you risk free returns at all times.
Arbitrage fund managers diversify your investments in the right places so that they can work on price differences in the best way possible. Their main goal is to provide you a return based on the price differences in an unstable market.
Best time for investment
Arbitrage funds need an unstable market to work because in stable market situations, the price differences remain very low. One has to remember that these funds are safe but their returns are limited. So, in stable markets, the returns translate to almost nothing. This also makes them successful only for a short period of time. An investor should only invest in ultra short term arbitrage funds when the market situation is uncertain.
If an arbitrage fund consists of 65% or more of equity products, it will be taxed as an equity fund which has tax benefits. If this ratio is not maintained, the arbitrage fund will be considered as a debt fund and will be taxed accordingly.