Prajna Capital - An Investment Guide

Here’s an insight into the world of arbitrage funds — what you must know before taking exposure in such funds. HOW IT WORKS For starters, an arbitrage fund tries to take advantage of price discrepancies for the same asset in different markets. For example, if the stock price of ABC Ltd is quoting at Rs 100 and its future price is Rs 110 in the derivatives market, then the arbitrage fund can buy the stock in the spot market and sell it in the futures market and gain Rs 10. Put simply, arbitrage funds are fixed income products that are free from equity risk. They are affected by the stock market trend (bullish or bearish) to the extent that the demand for stocks and liquidity in the markets is impacted, which in turn affects the arbitrage opportunities. Another factor that affects the arbitrage funds is interest rates. Fund managers believe that when interest rates are high, people instead of buying stocks upfront prefer to deal in the futures market as it requires only a fractio...