The main difference between arbitrage funds and liquid funds is that arbitrage funds exploit price differentials in equity and derivatives markets for returns, while liquid funds invest in short-term money market instruments for stability and liquidity, offering steady but lower returns compared to arbitrage funds.
Content Id:
- What Is Arbitrage Fund?
- Liquid Funds Meaning
- Difference Between Arbitrage Fund And Liquid Fund
- Arbitrage Fund Vs Liquid Fund – Quick Summary
- Liquid Vs Arbitrage Funds – FAQs
What Is Arbitrage Fund?
An arbitrage fund is a type of mutual fund that employs arbitrage strategies to capitalize on price discrepancies between cash and derivative segments of equity markets. It aims to generate returns by buying low and selling high simultaneously across different market segments.
Arbitrage funds exploit price differences between the cash and derivatives segments of equity markets. They buy stocks in the cash segment and sell equivalent futures contracts, aiming to profit from temporary pricing inefficiencies.
These funds aim for relatively low volatility and stable returns by leveraging arbitrage opportunities. They’re considered less risky than traditional equity funds due to their hedged positions and can serve as a tool for investors seeking moderate returns with lower market exposure.
For example, if a stock trades at ₹100 in the cash market and its futures contract is priced at ₹102, an arbitrage fund can buy the stock at ₹100 and simultaneously sell futures at ₹102, earning ₹2 per share.
Liquid Funds Meaning
Liquid funds are a type of mutual fund that primarily invests in highly liquid, short-term money market instruments like treasury bills, commercial papers, and certificates of deposit. They offer investors stability, liquidity, and modest returns compared to other mutual fund categories.
Liquid funds invest in highly liquid assets such as treasury bills and commercial papers, ensuring quick conversion to cash. They provide stability and relatively low risk while aiming for modest returns for investors.
These funds are suitable for parking surplus funds temporarily, offering higher returns than traditional savings accounts with relatively low risk. They enable investors to access their funds quickly without incurring significant losses.
For example, a liquid fund may invest in short-term government securities or highly rated corporate bonds. If an investor deposits ₹1,00,000 and earns a 7% annual return, they could receive ₹5,833.33 as interest over a year.
Difference Between Arbitrage Fund And Liquid Fund
The main difference between arbitrage funds and liquid funds is that arbitrage funds exploit price discrepancies in equity and derivative markets for returns, while liquid funds invest in short-term money market instruments for stability and liquidity, offering relatively lower but steady returns.
| Aspect | Arbitrage Funds | Liquid Funds |
| Investment Strategy | Exploits price differences in equity markets | Invests in short-term money market instruments |
| Risk | Moderate to Low | Low |
| Return Potential | Higher than liquid funds | Lower than arbitrage funds |
| Liquidity | Relatively less liquid due to market conditions | Highly liquid, enabling quick access to funds |
| Volatility | Generally lower compared to equity funds | Minimal |
Arbitrage Fund Vs Liquid Fund – Quick Summary
- An arbitrage fund, a mutual fund variant, exploits price differences between cash and derivatives in equity markets. It aims for profits by simultaneously buying low and selling high across market segments.
- Liquid funds, a mutual fund category, focus on highly liquid, short-term money market instruments like treasury bills and commercial papers. They provide stability, liquidity, and modest returns, catering to investors seeking low-risk options.
- The main difference between arbitrage funds and liquid funds is that arbitrage funds exploit price differences in equity and derivatives, while liquid funds invest in short-term money market instruments, providing stability and liquidity with relatively lower but steady returns.
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Liquid Vs Arbitrage Funds – FAQs
The main difference is that arbitrage funds exploit price differences in equity and derivatives, aiming for higher returns, while liquid funds invest in short-term money market instruments, offering stability and liquidity with modest returns.
The types include spatial arbitrage, where traders capitalize on price differences of the same asset in different locations; temporal arbitrage, focusing on price discrepancies over time; and statistical arbitrage, using algorithms to identify and exploit pricing inefficiencies.
The main advantages of arbitrage include the potential for risk-free profits, enhancement of market efficiency, liquidity provision, and the correction of pricing disparities across different markets, contributing to overall market stability.
The maximum return on liquid funds varies based on market conditions and the specific instruments they invest in. Generally, they aim for modest returns comparable to short-term interest rates, typically ranging from 3% to 6% annually.
Investing in arbitrage funds carries moderate risk, as they are subject to market fluctuations. While they offer potential for returns, investors should carefully consider their risk tolerance and investment objectives before investing.
Yes, SIP (Systematic Investment Plan) is allowed in liquid funds. Investors can set up SIPs to regularly invest a fixed amount in liquid funds, providing flexibility and convenience in managing their investments.
