Difference between Arbitrage Funds and Fixed Deposits

It is hard to overstate the importance of saving for emergencies and creating investments. It is difficult to predict the future, therefore the best anyone can do is to prepare for uncertainty by saving and investing properly. There is a wide variety of investments available, from those with a high level of risk to those with a lesser level of risk, and from those with a long-term commitment to those with a shorter time horizon.

An investor's decision on the investment type is driven exclusively by his risk tolerance and time horizon for recouping his initial investment. Typical investment vehicles for the general populace include fixed deposits and arbitrage funds.

What are Arbitrage Funds?

If you're looking to limit your risk as much as possible but still make money off of volatile markets, this equity-focused mutual fund is the way to go. Investors should still do market research to evaluate if the investment is a good fit for their portfolio, even when the risk is lower.

They are common in the cash and futures markets and profit from the inconsistencies in the pricing of funds that should trade at the same rate. Therefore, even though the price differences between the two markets are often not large, an investor will acquire stocks in the cash market and then sell the interest in those stocks in the futures market. Since the margins that arbitrage funds deal with are so small, they must trade a large volume to produce sizable profits.

Arbitrage funds, which aim to profit because multiple markets supply differing prices for the same stock, are likewise traded on several exchanges. For this reason, an investor can buy shares of stock at a discount and immediately sell them for a profit.

Some benefits of arbitrage funds include the following −

• Due to the simultaneous nature of the purchases and sales, the risk associated with this strategy is low.

• They do well even when markets are highly volatile.

• When compared to the normal income tax rate, the equity funds rate is lower.

Some disadvantages of arbitrage funds include the following −

• Because of the large number of transactions needed, the associated cost ratios might be considerable.

• It is risky to rely on them since payments are unpredictable.

What are Fixed Deposits?

These investments, which may also go by the label "time deposits," provide a higher rate of return to their owners up to the moment they mature. You may buy them at any bank, credit union, or charity shop. There is a shortage of capital, thus interest rates have been raised to reflect that. Additionally, the maturity date may be anything from one week to five years in the future; nonetheless, they cannot be redeemed before that time. Investors, however, are not allowed to get their money out or cancel the deal without potentially costly penalties.

For this reason, investors with a low-risk tolerance often choose fixed deposits.

The following are some of the advantages of fixed deposits −

• Pay out the same amount of interest every year for the duration of the investment.

• Their threat is minimal at best.

• Have a high rate of investment return relative to other accessible investment options.

• They haven't settled on a deposit amount yet.

However, they are not without their share of negatives, such as the following −

• Investors bear the risk of losing interest or paying the penalty if they remove their money before it fully accumulates.

• Though they have higher interest rates, they ignore the mounting inflationary threat.

Differences − Arbitrage Funds and Fixed Deposits

The following table highlights how Arbitrage Funds are different from Fixed Deposits −

Characteristics	Arbitrage Funds	Fixed Deposits
Definition	Arbitrage funds are a form of equity-focused mutual fund that can help conservative investors profit from volatile market situations.	Investments in fixed deposits earn a higher interest rate during the duration of the deposit up to its maturity date. There will be no risk to the investor's initial capital till then.
Risks involved	There are a number of dangers associated with arbitrage funds, including high expense ratios because of the large number of trades needed and unreliability because of the funds' speculative returns.	One possible drawback of fixed deposits is that investors may lose interest or be charged if they withdraw their money before the term of the deposit has expired.
Interest rate	Funds that specialize in arbitrage trading can have exceptional rates of return.	Fixed deposit interest rates are low.
Liquidity	Arbitrage funds often have greater liquidity.	The amount of money that may be withdrawn from a fixed deposit is quite little.

Conclusion

For those looking to make money in volatile markets without taking on too much risk, equity-focused mutual funds known as "arbitrage funds" are a great option. They provide enhanced liquidity in addition to high-interest rates. But fixed deposits, a special kind of investment account, provide a higher rate of interest to savers up until the moment their money matures.

It is important for investors to exercise caution when committing funds to fixed deposits since they may be unable to do so without losing interest or incurring a penalty. Regardless, these are examples of safe investing options.