Arbitrage funds are yet another type of mutual fund that works by leveraging the price differential in the cash and derivatives market so as to have profits. These returns depend primarily on the volatility of the assets. Arbitrage funds are very suitable for investors who do not wish to risk their hard earned money. Here, the investor purchases stock in the cash market, and at the same time, he sells the interest in the futures market. The difference leads to profit making by the investor. Basically a lot of people are investing in arbitrage funds, (just like mutual funds and unlike shares), and depending upon that collection and price of the asset, the profits or losses are distributed among the investors.
Now this might seem a bit technical, so let’s see how arbitrage funds work step by step:
1. An investor buys some equity shares of a company at a price, say $500, in the cash market.
2. The current rate of the share in the futures market is $550.
3. The investor sorts a futures contract to sell the share at $550.
4. Now, whenever the prices coincide, the investor sells his shares in the futures market for $550.
5. A profit of $50 is made per transaction.
6. The investor removes any transaction costs before calculating his net profit.
1. Now consider another scenario, an investor buys some equity shares at $100 at New York Stock Exchange.
2. Now he sells the share for $150 at NASDAQ.
3. This is a clear $50 earnings for him, which was quick, easy and risk free.
Who should consider this option?
Arbitrage funds are meant for people who are not very happy taking risks with their wealth. However, this lone factor cannot make you earn profits, you must also understand the volatility of the market, and must have an in-depth knowledge about the future stock predictions. Yet another factor to consider is that this type of investment is suitable for people who like to see quick results. You are investing in something, and at the same time you sell it to make some profits. Also, these returns are tax-efficient for a shorter period of time. It has been estimated that arbitrage funds usually end up giving profits somewhere around 7% over a 10 year period.
But always remember, no matter how safe it is, the returns are still not predictable and can move to the negative side of the scale. That is why investors, usually take the services of fund managers or consultants, who are experts in this field. Now this is something like further lowering the risks by investing in some good consultation firm.
One such name that is resonating in the market today is executium.com. Not only does it let you deal in crypto arbitrage, it also offers you a complete portfolio of related services. If you want to start with a lower amount, or invest millions of dollars, this firm takes care of all kinds of clients.