Arbitrage mutual funds v/s direct equity: Which is less risky?
What's the story
Investors often find themselves at a crossroads when choosing between arbitrage mutual funds and direct equity investments. While both options have their own advantages, understanding the risk dynamics can help in making informed decisions. Here's a look at the risk profiles of arbitrage mutual funds and direct equity investments, giving you insights into their volatility, return potential, and market exposure.
#1
Understanding arbitrage mutual funds
Arbitrage mutual funds capitalize on price differences between markets. They buy securities in one market and sell them in another at a higher price. These funds invest mainly in equities but keep a large part of the portfolio in debt instruments to reduce risk. Since they are based on market inefficiencies, they are less volatile than direct equity investments.
#2
Direct equity investments explained
Direct equity investments mean buying shares of companies directly from stock exchanges. This method offers higher returns but comes with greater risks owing to market volatility. The performance of direct equity is directly tied to company performance and market conditions, making it more unpredictable than arbitrage mutual funds.
#3
Risk factors in arbitrage mutual funds
While arbitrage mutual funds are less risky than direct equity investments, they are not risk-free. The returns are usually lower than direct equity due to their conservative approach. Market conditions can also affect their performance, but they are generally more stable than direct equity.
#4
Volatility in direct equity investments
Direct equity investments are prone to high volatility owing to factors like economic changes, company performance, and investor sentiment. The potential for high returns comes with the risk of significant losses if the market turns against you. Investors need to keep a close watch on market trends and be ready for sudden price changes.
#5
Comparing return potential
While arbitrage mutual funds provide stable but lower returns, direct equity investments offer higher return potential. The latter is subject to market conditions and company performance. While arbitrage mutual funds are a safer bet with stable returns, direct equity can be rewarding for those willing to take on higher risks for the chance of bigger gains.