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Mutual Fund Investors when planning for short-term investments generally pick up funds from the Debt category. Mostly they prefer liquid funds because they are very low risky and much liquid, investors can redeem whenever they want!
However, many investors compare arbitrage funds with liquid funds while picking up an option for their short-term investment. But if we look at the differences between arbitrage funds and liquid, it does not make any sense, to compare the two for the best short-term investment option.
Let’s discuss Arbitrage Funds vs. Liquid Funds and find out why it is a waste to compare these two for the best short-term investment option!
What Is An Arbitrage Fund?
An arbitrage fund is a hybrid fund majorly investing in equities and leveraging arbitrage opportunities in the market. These funds generate returns from a pricing mismatch between two exchanges.
The fund manager of an arbitrage fund earns the difference amount for you by buying and selling the shares at the same time. The difference between the selling price and the buying price of the share is your earnings.
The fund manager of arbitrage funds invests in equities only when they see an opportunity to earn returns is certain. In case they do not find any arbitrage opportunity they look towards investing in other options. These options can be short-term money market instruments and debt securities.
What Is A Liquid Fund?
Liquid funds are high in liquidity and ideal for short-term investments. They are a class of debt funds that invest in fixed-interest generating money market instruments.
Treasury bills, commercial paper, and so on are examples of the underlying securities in the portfolio of a liquid fund.
Arbitrage Funds vs. Liquid Funds!
Following are the main differences between Arbitrage funds Vs Liquid funds:
Liquidity Factor-
People when investing for the short-term, the primary factor they look for is high liquidity, so that they can encash their funds anytime.
Liquid funds are far better than arbitrage funds in terms of liquidity. An arbitrage fund takes at least 3 to 5 days for redemption while liquid funds can be encashed within 24 hours.
Returns On Investment-
After Liquidity the second factor is returns on investment. Arbitrage funds give better returns than liquid funds as they invest in inequities. They perform better in volatile markets as there are ample arbitrage encashment opportunities in the market.
Risk On Investment-
The third factor is a risk on investment. Liquid funds are much safer funds than compared to arbitrage funds, as it invests mainly in debt-related instruments and not inequities like the Arbitrage fund do.
If you plan to invest in short-term, choose liquid funds as they are safer than arbitrage funds, and remember safety is the second key factor to consider while investing in short-term.
Exit Load Envied-
Liquid funds usually do not charge any exit penalties. While you must pay charges of 0.25% to 0.5% if you want to exit from Arbitrage funds. These charges are applicable when you plan to exit within the first three to six months (premature withdrawal) of the investment.
Who Should Invest In Arbitrage Funds?
The risk profile of an arbitrage fund is similar to that of a debt fund. These funds generally use the Liquid Fund Index as a benchmark. You must invest in arbitrage funds if you want to invest in equity but don’t want to bear the risks.
Risk-averse investors can park their money in an arbitrage fund when the market is fluctuating and earn good returns. However, as these funds invest in equities short-term investors with 6-month to 1-year investment term is not advised to invest in these funds
Who Should Invest In Liquid Funds?
Liquid funds are high in liquidity and ideal for short-term investments. Also, these are fixed income-generating funds of the debt category.
Thus, investors looking to park their surplus money for 6 months to 1 year, can plan to invest in liquid funds. Also, if you are planning to create an emergency fund, you must plan for it in Liquid funds.
To get more details about the fund you can get in touch with us. Call us on- 0612-6604453 or mail us at [email protected]
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).