Difference Between Arbitrage Funds vs Liquid Funds

Many opportunities exist to assist individuals seeking to grow their money when investing. Money market mutual funds have long been considered suitable for those who want low-risk investments. Yet they are ready to put their money where they expect to get it quickly. However, there is a newcomer in the market: arbitrage funds.

This could be an alternative to liquid funds, which have been marketed as offering the capacity for steady earnings and the opportunity for greater returns.

But are arbitrage funds better than liquid funds in the long run?

This guide will answer this question and outline the difference between arbitrage funds and liquid funds and their relative risk, return, and uses.

Arbitrage funds are mutual funds that exploit price differences in equity and derivative markets. To profit from such arbitrage opportunities, they buy stocks at lower prices in cash markets and sell them at a higher rate in the futures market.

These funds are typically invested using 70%-90% in equities for cash-futures arbitrage and the remaining in debt instruments or cash to ensure liquidity. They offer moderate returns with relatively low risks, thus suitable for risk-averse investors seeking short-term, tax-efficient investment portfolios.

Liquid funds are a type of debt mutual fund used for short-term investment. They invest in high-quality, short-term instruments such as treasury bills, commercial papers, and certificates of deposit. The primary objective of liquid funds is to provide investors with a safe place to park their funds.

It earns a better return than a savings account, with high liquidity and low risk. These funds are ideal for managing surplus cash or short-term financial goals, offering quick access to funds with minimal volatility.

In conclusion, depending on the investor's needs, the better option must be considered. Liquid funds guarantee the stability of your returns. Yet, arbitrage funds are available if you are willing to take a slightly higher risk with the expectation of better returns.

An investor should consider many factors before arriving at a decision. These include their financial goals, the time they are willing to invest, and their level of risk tolerance.

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