Arbitrage funds to trailing returns: Expert answers investment questions

The performance of a fund varies based on the performance of the underlying asset classes, says Ashwani Bhatia

If I have a one-year investment horizon, should I opt for arbitrage or short-duration debt funds? I understand that short-term funds, too, have default risks. What are the risks associated with arbitrage funds?

Fundamentally, the returns for short-duration and arbitrage funds should be in the same range. Arbitrage spreads are linked to short-term interest rates in the economy. Arbitrage funds are, however, relatively low-risk products. These schemes capitalise on profitable arbitrage opportunities (price differential in a stock) between cash and futures markets. The risk that an investor may face is in the form of lower interest rates in the economy or