Things you should consider while investing in arbitrage fund

Bagging high returns with minimum risk exposure is what most investors carve for. To address this investor demand, there are several products in the mutual fund market and arbitrage fund is one of the better-known investment options, with the lowest risk exposure.

An arbitrage fund is one of the equity mutual funds which tides on the mispricing between the cash markets or spot markets, and derivatives or futures markets. The opportunities arising out of this substantial volatility offers relatively risk-free returns to the investors. These funds are ideal funds for the risk-averse investors and are considered to be safe options for parking excess money. But before investing in these funds one should consider some basic aspects of these funds.

Let's have a look at these aspects.

Low Risk-

These funds do not carry any counterparty risk as the trades are carried out on the exchanges. As well as there is no major risk exposure when fund managers trade a buy and sell together in the cash and futures market. So these funds can be considered as low-risk funds than the diversified funds.

Returns- The fund manager of these funds tries to generate alpha using the price differentials. If we look at the past returns these funds have offered 7-8 per cent returns over a longer time horizon of 5-10 years. These funds can be a good opportunity to earn return, but investors should remember that there is no guarantee about returns.

Cost- Cost is one of the important aspect that investors should look into. These funds charge an annual fee in the percentage of the fund's assets. The fees is inclusive of the fund manager fees and management charges. Investors should always keep this in mind that due to frequent trading these funds attracts higher expenses and also have a high turnover ratio. Additionally, the fund levies an exit load which can further eat up returns.

Investment Horizon- These funds are suitable for the moderate time horizon investors, that is, say 3-5 years. The returns of these funds are highly dependent on volatility, so choosing a lump sum option over SIP seems beneficial for investors.

These funds are taxed just like equity funds and attract LTCG and STCG tax. That is, if investors hold the investments for more than a year, then it attracts 10 per cent LTCG and if investor exits before one year, the investment attracts 15 per cent STCG.