Arbitrage Funds v/s Gilt Funds: Which is safer?
What's the story
Investors often find themselves torn between arbitrage funds and gilt funds when it comes to low-risk investment options. Both have their own set of benefits and drawbacks, making it important to know how they work. While arbitrage funds capitalize on price differentials in markets, gilt funds invest in government securities. Here's a look at their differences, so you can make an informed choice.
#1
Understanding arbitrage funds
Arbitrage funds are a type of mutual fund that exploit the price difference of an asset in different markets. They buy low in one market and sell high in another, usually within seconds. This strategy is mostly employed in equity markets, where the price difference is common. Since the risk is low, they are considered safer than regular equity funds. However, returns are usually modest, ranging from 3% to 5% annually.
#2
Exploring gilt funds
Gilt funds invest in government securities, which are considered the safest as they are backed by the government. These funds invest in bonds with varying maturities, from short-term to long-term. The interest rate risk is higher with gilt funds as bond prices fall when interest rates rise. However, they offer better returns than arbitrage funds, usually ranging from four% to seven% annually.
#3
Risk factors involved
While both arbitrage and gilt funds are low-risk investments, they come with their own risks. Arbitrage funds are subject to market volatility and liquidity risks as trades are dependent on market conditions. Gilt funds are affected by interest rate fluctuations and inflation risks, which can affect bond prices over time. Knowing these risks can help you choose the right option for your portfolio.
Tip 1
Choosing based on financial goals
Your choice between arbitrage and gilt funds should depend on your financial goals and risk appetite. If you want stable but modest returns without much market exposure, arbitrage may be the right option for you. If you're okay with a little more risk for potentially higher returns over time, consider investing in gilt funds instead.