Arbitrage funds: Returns likely to be healthy in rising or volatile markets

Excess funds chasing arbitrage opportunities may, however, reduce potential returns

Investors have been flocking to arbitrage funds in large numbers. Over the past three months ended February 29, 2024, this category has received net inflows of Rs 32,761.7 crore.

“With interest rates getting reset upward, arbitrage yields have moved higher. This increase was supported by continuing flows into equity markets and greater participation, which led to increased opportunities for arbitrage funds. A combination of reasonable returns, relatively low risk profile, and tax efficiency made these funds attractive to investors,” says Sirshendu Basu, head, products, Bandhan Asset Management Company (AMC).

How do they work

Arbitrage fund managers try to take advantage