Savings accounts are the first choice for parking money safely and securely. They are easy to use and offer complete access to your funds. Moreover, your deposits are also fully guaranteed. However, in an environment of high inflation, your savings may not appreciate in real terms.
If you are looking for better returns without taking high risks, then arbitrage funds can be an option. They offer higher returns than a regular savings account with tax benefits and low risk. This blog will help you understand the importance of arbitrage funds and the risks involved with it.
What are arbitrage funds?
Arbitrage funds generate profits based on the price variation of an identical item traded in different markets. They generate profits by purchasing an item at a low price and selling it at a high price. This generates a small but low-risk profit. Unlike a fixed-interest savings option, which generates a fixed return, an arbitrage fund generates a stable but slightly volatile return.
Why arbitrage funds outperform savings accounts
There are a number of reasons which make arbitrage funds more profitable:
- Higher returns with low risk
The interest rate in savings accounts is quite low, around 3-4%. On the other hand, arbitrage funds provide higher returns of around 4-6%. Here, investors earn money with minimal risk. - Liquidity and accessibility: Although savings accounts provide instant liquidity, arbitrage funds provide liquidity in 2-3 business days. This is enough for short-term or emergency needs. The combination of both provides better results.
- Smart investment tools: By using a mutual funds screener, one can compare funds based on their performance, risks, and costs, thereby increasing the chances of getting consistent returns.
Savings account vs arbitrage funds
Let’s understand the difference now.
| Feature | Saving Account | Arbitrage Funds |
| Returns | ~3–4% fixed | ~6-8%, market-linked |
| Risk | Very low | Low to meidum, market-linked |
| Liquidity | Instant | 2–3 business days |
| Best For | Emergency funds | Short- to medium-term growth |
Takeaway: Arbitrage funds provide higher growth potential compared to savings accounts while offering reasonable safety and liquidity benefits.
Risks and considerations
Investors should examine these peculiar dimensions before making any investment in arbitrage funds, as they do not offer a completely risk-free investment.
- Market risk: The returns on funds depend on minor market price alterations, which can change over time.
- Execution risk: There are chances that transactions may not take place at intended price levels, resulting in a slight impact on profits.
- Changes in rules and taxation: Any change in the rules or taxes may impact the returns earned by the arbitrage fund.
- Expense ratio: Higher expenses mean higher fees paid to the fund managers. Hence, it’s essential to check the expense ratio before investing in arbitrage funds.
- Investment horizon: A medium-term investment is required for an arbitrage fund to be effective, and a short-term investment might not benefit from market fluctuations.
Who should invest in arbitrage funds?
- Investors need better investment results compared to a savings account, but with low risk.
- Investors with a medium investment term.
- People who want to invest their money in a tax-efficient manner.
- Individuals who want to invest in a low-risk investment instead of equity or debt schemes.
Conclusion
Arbitrage funds offer higher returns and tax efficiency along with liquidity. With the help of tools such as screeners for mutual funds, investors can put their idle money to better use while ensuring that it is safely invested. Arbitrage funds offer a viable investment and savings solution for short-term goals and emergency funds.
