Arbitrage Funds Vs FDs: A Comparison Of Risk, Returns And Liquidity

Mutual fund investments are gaining popularity among investors due to their potential to offer higher returns over traditional savings instruments. Many financial experts suggest that arbitrage funds are a smart way to build wealth. The arbitrage funds often offer better returns than traditional options like fixed deposits, making them an attractive alternative investment instrument.

Arbitrage funds are a type of mutual fund where the fund managers follow a strategy to leverage the price differences of the same asset in different markets to make a profit.

For example, if a stock is priced lower in one market and higher in another, you can buy low and sell high. However, this strategy needs strong market knowledge and regular research. This is why these funds are not recommended for risk-averse investors.

However, many arbitrage funds can help investors benefit from this investment strategy. One can choose a fund based on its expense ratio, fund manager, and other factors. These funds work similarly to regular mutual funds, where one can invest through systematic investment plans (SIPs).

Compared to FDs, which have a fixed tenure and typical return rate in the range of 6-7% per annum, some arbitrage funds offer comparatively higher returns. Generally, arbitrage funds offer an average return of 7-8% per annum. Past trends show that over the last one year, most arbitrage funds have delivered close to 8% returns.

Based on five-year annualised data, the returns range between 7% and 7.5%, while the three-year average returns stand at 8%. This makes these funds more attractive compared to FDs.

FDs are preferred by conservative investors because of the secured return. They generate fixed returns at a pre-defined rate, irrespective of the market conditions. 

In contrast, arbitrage funds are riskier because of their stock market-linked nature. While less risky than pure equity funds, they are not fully risk-free.  

One of the drawbacks of FDs is that they are less liquid compared to arbitrage funds. Investors may face penalties if they want to withdraw their money prematurely. Hence, in case of an emergency, one may not find their FD money accessible. Premature liquidation of your FD investment may also lead to losses due to reduced returns and fees levied by the banks.

On the other hand, arbitrage funds generally allow investors to sell their units anytime after the first month of investment. However, the redemption of mutual fund units within 30 days may attract a penalty.

To conclude, choosing between FDs and arbitrage funds should depend on your financial goals, investment horizon and risk tolerance. It’s advisable to evaluate all essential factors before investing in any of these two instruments.