Arbitrage funds follow arbitrage strategies in which they buy and sell securities simultaneously in different markets and earn profit from the price difference. According to the SEBI arbitrage funds must invest a minimum of 65% in equity and equity-related instruments.
The objective of arbitrage funds is to generate decent returns by benefitting from the arbitrage opportunities in different markets or market segments. They aim to benefit from highly volatile market conditions.
Arbitrage funds are best suitable for investors with a low risk appetite looking to generate moderate returns from a volatile market. We feel that these funds can be a suitable option for investors who are looking for a low-risk investment option with the potential for higher returns than traditional debt funds. However, it is important to note that arbitrage funds may offer lower returns than other equity mutual fund categories and may not be suitable for long-term investment goals. The ideal time horizon can be of few weeks to a few months. But we feel liquid funds are a better alternative for the same investment purpose.