Difference between Arbitrage Funds and Fixed Deposits

DifferencesFinanceInsurance & Investment

It is impossible to place enough emphasis on the significance of making investments and setting money aside for unexpected expenses. Since it is impossible to know what will happen in the future, the most that individuals can do is make sure they save money and invest it wisely at the same time. There are many different kinds of investments, ranging from those with a high risk to those with a lower risk, and from those with a long term to those with a short duration.

The choice that an investor makes about the kind of investment he makes is solely determined by how long he is willing to wait to recoup the money that he invested as well as the degrees of risk that are involved. The majority of people often put their money in fixed deposits or arbitrage funds as their investments.

What are Arbitrage Funds?

This equity-focused mutual fund is the perfect choice for investors who like to minimize their exposure to risk but yet want to profit from unpredictable markets. Despite the fact that they involve a lower level of danger, investors should nevertheless analyze the market to determine whether or not the investment is appropriate for their portfolio.

These funds are prevalent in the cash and futures markets, and they take advantage of the price disparities that exist between funds that should have the same price. As a result, an investor will buy stocks in the cash market and then sell the interest in those stocks in the futures market, despite the fact that the price disparities between the two markets are typically not significant. Arbitrage funds need to trade a huge number in order to generate big gains since the margins they work with are so low.

Arbitrage funds can also be traded on many exchanges, taking advantage of the fact that different markets provide varying prices for the same stock. Therefore, a stock can be purchased by an investor at a lower price, and then the investor can instantly sell the shares at a higher price.

The following are some of the advantages of arbitrage funds −

  • It is low-risk tolerance due to the fact that security is bought and sold at the same moment, which results in it carrying less risk.
  • They are able to thrive even under very fluctuating market conditions.
  • They are taxed as equity funds, which results in a rate that is lower compared to the rate that applies to regular income.

On the other side, the following are some of the drawbacks of arbitrage funds −

  • Due to the huge volume of trades that are required, the expenditure ratios might be rather high.
  • Due to the unpredictability of their payouts, they cannot be relied upon.

What are Fixed Deposits?

These types of financial instruments, which may also go by the name "time deposits," present investors with a greater rate of return on their assets up to the point at which the investments mature. They can be purchased through financial institutions such as banks, credit unions, or thrift institutions. The increased interest rates are intended to compensate for the limited availability of funds.

In addition, the maturity date might range from one week to five years; however, they cannot be redeemed before the maturity date. Nevertheless, investors are not permitted to withdraw their money or otherwise terminate the transaction without running the danger of incurring a penalty.

Because they are so risk-free, fixed deposits are popular among investors with a limited tolerance for taking chances.

The benefits of fixed deposits include the following −

  • Maintain a consistent level of interest payouts over the term of the investment.
  • They present a low level of danger.
  • Have a high rate of return on investment in comparison to other available investment opportunities.
  • They do not have a predetermined sum for their deposit.

On the other hand, they have several drawbacks, such as the following −

  • In the event of a withdrawal, investors run the risk of not receiving the accrued interest or being subject to a penalty.
  • They do not take into account the growing threat of inflation, despite having higher interest rates.

Differences: Arbitrage Funds and Fixed Deposits

The following table highlights the major differences between Arbitrage Funds and Fixed Deposits −

Characteristics Arbitrage Funds Fixed Deposits
Definition The term "arbitrage funds" refers to a specific type of equity-focused mutual fund that is suitable for conservative investors who are interested in making a profit from turbulent market conditions. Fixed deposits are a type of financial instrument that offer investors a greater interest rate on their investments until the maturity date. Until that point, the investor's principal is safe.
Risks involved Arbitrage funds provide a variety of risks, including high expense ratios due to the huge volume of transactions that are required, as well as unreliability as a result of the funds' uncertain payoffs. One of the potential downsides associated with fixed deposits is that investors are unable to access their money without either giving up any interest that has been accrued or paying a fee.
Interest rate Arbitrage funds typically provide very high rates of return. The interest rates on fixed deposits are quite low.
Liquidity The liquidity of arbitrage funds is often higher. The level of liquidity offered by fixed deposits is minimal.

Conclusion

Arbitrage funds are a type of equity-focused mutual fund that is excellent for investors who are trying to profit from turbulent markets but do not want to take excessive risks. They feature high interest rates in addition to increased levels of liquidity. On the other hand, fixed deposits are a type of financial instrument that offer investors a greater interest rate on their investments up to the time when the investment matures.

Investors need to be cautious when committing to fixed deposits since there is a possibility that they may be unable to withdraw their money without forfeiting any interest they have earned or being subjected to a penalty. Despite this, they are both considered to be low-risk sorts of investments.

raja
Updated on 18-Aug-2022 14:08:07

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