Arbitrage Fund VS FD English

Arbitrage Fund Vs FD

The main difference between an Arbitrage Fund and a Fixed Deposit (FD) is that arbitrage funds, being market-linked, offer potentially higher returns but with more risk. On the other hand. FDs provide stable, lower returns with minimal risk and are not influenced by market fluctuations.


Arbitrage Fund Meaning

An Arbitrage Fund is a type of mutual fund that exploits price differences in cash and derivatives markets to generate returns. These funds aim to offer minimal risk by simultaneously buying and selling securities, thereby benefiting from asset differential pricing.

Arbitrage funds operate by capitalizing on price discrepancies between cash and futures markets. They buy stocks at a lower price in the cash market and simultaneously sell in the futures market, at higher prices.

This strategy aims to generate returns from the difference in prices, regardless of market direction. These funds typically offer lower risk compared to pure equity funds, making them suitable for conservative investors seeking steady, moderate returns.

Imagine a stock priced at ₹100 in the cash market but ₹102 in the futures market. An arbitrage fund buys at ₹100 and sells futures at ₹102, profiting ₹2 per share, minus costs.

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What Is Fixed Deposit?

A Fixed Deposit (FD) is a financial instrument banks offer, where money is deposited for a fixed term at a predetermined interest rate. It guarantees the return of the principal and earned interest upon maturity, providing a secure, low-risk investment option.

A Fixed Deposit is a secure investment where you deposit a lump sum with a bank for a specific duration. The bank pays interest at a fixed rate, which is higher than a regular savings account.

Upon maturity, the deposited amount plus the accrued interest is returned. FDs are popular for their safety and predictability, making them a preferred choice for risk-averse investors and those seeking stable income generation.

For example: If you deposit ₹1,00,000 in a Fixed Deposit at a 6% annual interest rate for 5 years, you will receive ₹1,33,822 at maturity, combining your principal and interest earned over the term.

Arbitrage Funds Vs Fixed Deposits

The main difference between Arbitrage Funds and Fixed Deposits is that Arbitrage Funds seek potentially higher returns by exploiting market inefficiencies, carrying moderate risk. On the other hand, Fixed Deposits offer stable, lower returns with the safety of principal and interest guarantees, positioning them as a safer, low-risk investment option.

FeatureArbitrage FundsFixed Deposits
RiskModerate, depending on market conditionsLow, as they are not subject to market fluctuations
ReturnsPotentially higher, varies with the marketFixed, lower returns compared to equity-linked investments
Investment StrategyExploits price differences in marketsSimple deposit with a fixed interest rate
LiquidityGenerally higher, can be redeemed easilyLower, early withdrawal may attract a penalty
TaxationTaxed as per equity fund taxation rulesInterest is taxed as per the individual’s tax slab
SuitabilitySuitable for risk-tolerant investors seeking moderate returnsPreferred by risk-averse investors seeking guaranteed returns
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Difference Between Arbitrage Fund and FD –  Quick Summary

  • The main difference between Arbitrage Funds and Fixed Deposits is that Arbitrage Funds seek higher returns by utilizing market inefficiencies and carry moderate risk, while Fixed Deposits offer stable, lower returns with guaranteed principal and interest, ensuring a safer, low-risk investment.
  • An Arbitrage Fund is a mutual fund exploiting cash and derivatives market price differences to yield returns. It aims for minimal risk by concurrently buying and selling securities, capitalizing on asset price differentials.
  • A Fixed Deposit is a bank-