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Arbitrage Funds Vs Liquid Funds: What Is Better?

Find out how arbitrage funds fare compared to liquid funds. Get a detailed analysis of the pros and cons of each fund to understand which fund may be better suited to your investment needs.
April 18, 2024
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Mutual fund investors generally invest in liquid funds, ultra short term funds, overnight funds, and arbitrage funds for their short term investment goals.

The main reason for this is the high liquidity and low risk that these funds offer compared to other mutual funds. These are features of most debt funds. Except, arbitrage funds aren’t debt funds!

While liquid funds, ultra short term funds and overnight funds are debt funds, arbitrage funds are hybrid funds that only invest a part of their capital in debt instruments. 

In this story, we will put arbitrage funds under the microscope by comparing them to one of the most popular short term investment options, liquid funds.  

What Are Arbitrage Funds?

It would help to know what arbitrage means before talking about arbitrage funds. In short, arbitrage means buying a commodity at a lower price and selling the same commodity for profit elsewhere.  

This is what arbitrage funds do - they leverage arbitrage opportunities, that is, the difference in the price of shares across markets, to generate returns. An arbitrage fund invests at least 65% of its money in equity. 

Arbitrage funds are known to generate 4-7% returns over the long term. However, arbitrage funds can be very volatile over the immediate short term

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