Arbitrage funds v/s monthly income plans: Which offers better returns?
What's the story
Investors often find themselves torn between arbitrage funds and monthly income plans. Both options provide unique benefits, but their return potential varies considerably. While arbitrage funds capitalize on market inefficiencies for profits, monthly income plans focus on regular payouts. Knowing the difference can help you make informed investment decisions. Here's a look at the return potential of both options, and how they can fit into your financial strategy.
#1
Understanding arbitrage funds
Arbitrage funds are mutual funds that exploit price differences between cash and derivatives markets. They buy stocks in the cash market and sell equivalent stock futures in the derivatives market. The strategy is low-risk, as it locks in profits from price discrepancies. Historically, these funds have given returns of around 6% to 8% annually, depending on market conditions.
#2
Monthly Income Plans explained
Monthly income plans (MIPs) are hybrid funds that invest primarily in debt instruments with a small equity component. They are designed to provide regular income through monthly payouts. While MIPs may not guarantee high returns like equity investments, they offer stability and predictability. The expected returns from MIPs range between 6% and 9% per annum, depending on the fund's asset allocation.
#3
Risk factors involved
The risk profile of arbitrage funds is generally lower than that of equity-oriented investments, given their hedging strategy. However, they are still subject to market volatility risks. Monthly income plans are less volatile as they invest mainly in debt securities but come with interest rate risk and credit risk associated with bond markets.
Tip 1
Cost considerations
When choosing between arbitrage funds and monthly income plans, it's important to consider expense ratios and other costs involved. Arbitrage funds usually have higher expense ratios due to active management strategies, while MIPs may have lower costs due to passive management styles. Always check the total expense ratio (TER) before investing, as it impacts net returns over time.