Arbitrage Funds or Index Funds – Which is Better for Your Investment
People now understand the importance of investment and the benefits it offers. Gone are the days when keeping money in a savings account was the only way to save hard-earned money. Mutual funds are one such method that offers higher benefits if the investment is made in the right scheme at the right time.
There are different types of mutual funds– bond funds, target date funds, money market funds, and stock funds. All of them have their risks, features, and benefits. There are two main types of mutual funds that people are now taking a keen interest in arbitrage and index funds. Here’s everything you should know about what is an index fund and arbitrage funds to make a sound decision.
What is Index Fund?
An index fund is an exchange-traded fund that tracks and matches the components of the stock market. With broad market exposure and low turnover, these funds offer benefits regardless of market trends. They imitate the stock market index such as National Stock Exchange, BSE, Nifty, Sensex, and more.
For example, suppose an index fund is tracking the performance of the NSE and will have around 50 stocks in the portfolio in the same manner as the NSE. Also known as the form of passive investing, you don’t have to manage the fund actively. The main goal of an index fund is to beat the market trends, monitor the stock performance, and await the results.
The management cost or expense ratio is lower, considering daily human management is not required. Maximum people invest a particular amount regularly in index funds, monitor performance, and let their funds grow.
What is an Arbitrage Fund?
Also, a type of mutual fund, the arbitrage fund functions on the mispricing of the shares taking advantage of the future and current securities, generating maximum returns. In an arbitrage fund, your fund manager buys and sells shares in derivative or futures markets. What you earn is the difference between selling and the purchase price.
Suppose you brought a share worth Rs. 3,400 and then sealed a contract to sell it at Rs. 4,400. The difference in the selling and cost price, which is Rs. 1,000, is your profit here.
Who Should Invest in Index Fund?
Since index fund functions by tracking the market trends and index, the returns are similar. Investors with a lower risk appetite and those who want to understand the market trend and suffer minimum loss should look for index funds. There is zero risk element in the index funds since it is not actively managed by the fund managers eliminating the expense ratio as well, which is quite high and expensive.
Who Should Invest in an Arbitrage Fund?
It’s a low-risk fund as much purchasing and selling occur in the futures and cash markets. The benchmark for an arbitrage fund is BSE 0.23% liquid fund index. An arbitrage fund is a beneficial option to divulge for an investor who wants to learn about the market but wants low-risk exposure.
Factors to Consider While Investing in Index or Arbitrage Fund
Now you know what is an index fund and, what is arbitrage fund, and who should invest in it, making a decision will be easy. However, one should be aware of all the factors regardless to be on the safer side. Here are the various factors to consider before investing in the index or arbitrage fund-
Before investing, you should access the profits you will make when you invest your money in either of the funds. Your fund manager will analyze the market and invest in the stocks and shares that bring in the most profit. Even though there are no guaranteed returns in both index and arbitrage funds, you will have to decide purely based on past and present market trends.
2. Understand your financial goals
Determine whether your financial goals need to be fulfilled in the short or the long term. These funds are better than just keeping your money in a savings account. These investment funds can be used as an emergency fund whenever the situation demands.
Check the tax deductions of both index and arbitrage funds. You can leverage the benefit of investing in both funds once you meet the required slabs.
Top 5 Arbitrage Funds
Now that you know what is arbitrage fund, here are the top 5 arbitrage funds in the market currently-
- Edelweiss Arbitrage Fund
- Nippon India Arbitrage Fund
- Axis Arbitrage Fund
- Invesco India Arbitrage Fund
- Kotak Equity Arbitrage Fund
Top 5 Index Funds
Now that you are aware of what is an index fund, here are the top 5 index funds-
- IDFC Nifty 50 Index
- Nippon India Index S&P BSE Sensex
- HDFC Index S&P BSE Sensex Fund
- UTI Nifty 50 Index Fund
- Tata Nifty 50 Index Fund
Mutual funds are the ultimate way to invest your money for a long time and let it grow. Do your research thoroughly and invest your funds in the right place, depending upon your goals and requirements. You can also research on your own by visiting the SEBI website and reading the government-issued guidelines about investing in mutual funds.