Evaluating the Best Fund
There are a wide variety of funds and you can pick one depending upon your financial needs. In this article, we will compare Arbitrage Fund Vs. Equity Fund. The comparison will help you choose the best fund for your portfolio.
What is an Arbitrage Fund?
Fund managers are entrusted with the responsibility to make money from your investments and generate good returns. Arbitrage funds allow them to do so using a clever strategy. These types of funds rely on the timing difference between when shares are bought and sold. Both transactions take place at different price points. For example, if someone notices that stock prices change across exchanges they can buy low and sell high. This means you buy from where it’s cheaper than other places then sell where it is higher. Similar transactions take place in the case of spot pricing versus futures transactions. In such transactions while buying and selling you do not own either side until both conditions return equal value.
Arbitrage Funds have become more popular with investors looking for new investment opportunities. There has been a significant increase in ETFs over the past decade. This type of hybrid equity-oriented management style leverages arbitraging markets.
What is an Equity Fund?
Equity Funds have the potential to offer better returns than term deposits or debt-based funds. These funds spread out your investment amount across companies from different sectors. These companies have diverse market capitalizations and offer varying returns as well. There’s an element of risk associated with these funds because their performance depends on various factors. It fluctuates with the performance of stocks of the invested companies in the markets.
Equity funds are riskier than other types of mutual funds, but also have the potential for higher returns. They are suitable for investors with a large risk appetite and looking for higher returns.
Arbitrage Fund vs Equity Fund – Difference Between Arbitrage Fund and Equity Fund
We can compare Arbitrage Fund Vs. Equity Fund on the basis of the following factors:
- Risk – Arbitrage funds are less risky than equity funds. An arbitrage fund is good for investors who want to invest in equity but are wary of the risk.
- Returns – Returns are average in an Arbitrage fund. You can earn approx 7% to 8% if you stay invested for 5-6 years. Whereas Equity funds offer better returns in comparison to Arbitrage funds.
- Tax – Taxation of both Arbitrage funds and Equity funds is similar. Long-term capital gains (LTCG) is 10% and Short term capital gains (STCG) is 15% for both of them. ELSS is the only equity scheme that provides tax benefits. You can avail exemption up to Rs. 1.5 Lacs under section 80C of Income Tax Act. This scheme has a lockin period of 36 months.
- Expense – In arbitrage funds, trades are done on a daily basis hence transaction costs can be huge. Arbitrage fund may levy an exit load if you redeem your units within 30 to 60 days of purchasing them. The expense ratio of equity funds is generally on the lower side. Exit load on equity funds depends on the scheme. Mostly it is applicable if you redeem units within one year.
Arbitrage Fund vs Equity Fund: Which is a Better Investment Option?
Following are the main points of differences between Arbitrage Fund Vs. Equity Fund
Arbitrage Fund – An arbitrage fund is a good investment for an investor who wants to invest in equities but with lower risk exposure. The risk profile of these funds is similar to that of a debt fund. They use the liquid index as their benchmark, which makes them ideal investments with fluctuating markets. Investors can park their money for the long term if they are not willing to bear risks.
Equity Fund – Investing in equity funds is a decision that depends on your risk-taking capacity. You must review your financial profile to understand your investment horizon, needs, and objectives. If you have long-term goals or are just starting out investing for the first time then equity can provide more growth opportunities. It gives better returns than other investments like bonds. These instruments offer stability but usually their potential return on initial investment is lower than equity.
For those looking to make their first foray into the stock market, large-cap equity funds may be a great place to start. These funds invest in shares of companies that have historically delivered stable returns over time and with low-risk levels– making them an excellent choice for investors new or old.
Investing in diversified equity funds is a good way to invest your money for those who are confident about the market’s future and want to take calculated risks. These investments can be made across companies of all sizes, which means they have lower risk than other types of portfolios that focus on only small-cap or mid-cap stocks.