The 43-player mutual fund industry had witnessed net inflows of Rs 5,225 crore and 6,303 crore in arbitrage funds in August and July, respectively
Market volatility doesn't entail more risk for the investor in the case of arbitrage funds. In fact, arbitrage opportunities exist only when the markets are relatively unstable.
These schemes are treated like equity fund for the purpose of taxation. The returns can be in line with the debt funds and will not be influenced by the movements in equity markets.
In an attempt to reduce risk and enhance returns, mutual funds have come out with hybrid products that offer more than debt fund returns, but still maintain equity tax treatment.
Arbitrage fund takes advantage of the mispricing between two markets thus hedging against risk. The returns generated by arbitrage funds are not too high but it is the risk-free nature. According to financial expert Rajiv Geol, investors looking for consistent and dependable wealth creation, may select this class of fund for investing.
Arbitrage funds scores over Debt and Equity Mutual funds by generating highest post-tax returns of 9% against 8.4% for debt and negative 4.1% for equity for 2011-2012 period, as per the latest analysis by CRISIL Research.