Arbitrage Funds
The most popular product that is sold on the premise of tax breaks in this country is insurance. Arbitrage funds probably comes next, especially in the wake of demonetization. As these funds are gaining momentum, let us examine what it offers! Definition Arbitrage Funds (AF) is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the volatility of the asset. In simpler terms, this fund mimics a stock trader with his position covered. It buys stocks in the equity market and simultaneously sells it in the derivatives market. The price differential between equity market & derivatives market is used to generate returns for the fund. Performance Arbitrage Funds perform very well in bull markets, when volatility is high and money market yields are low - present times. And they do not perform in stagnant/bear markets and when money market yields are high (2010-2013). Although the performan...