Difference Between Arbitrage Funds and Fixed Deposits

The need to invest and save cannot be overemphasized. While the future remains unpredictable, one can only do so much by making sure to save and invest wisely during this time. 

There are many types of investments, from long-term to short-term, and from high-risk to low-risk investments. 

The investor's choice of the type of investment is purely based on how long he can wait to recoup the investment amount and the level of risk involved. 

Arbitrage funds and term deposits are some of the most common investment options.

Arbitrage Fund

This is a stock-focused mutual fund ideal for risk-averse investors looking to profit from volatile markets. Although less risky, investors should research the market to determine if the investment is right for their portfolio.

Common in cash and futures markets, these funds take advantage of price differences between funds that are supposed to have the same price. 

Therefore, investors buy stocks in the spot market and sell interest in the futures market, although the difference between stock prices is usually small. 

To make up for small profits, arbitrage funds have to trade a lot to make significant gains. 

Arbitrage funds may also trade on different exchanges where there is a price difference for the same stock. 

Therefore, investors can buy shares at a lower price and immediately sell them at a higher price. 

The benefits of arbitrage funds include:

  • Low-risk tolerance due to simultaneous buying and selling of securities
  • They can thrive when markets are highly volatile 
  • They are taxed as stock funds and are lower compared to ordinary income tax rates 

On the other hand, the disadvantages of arbitrage funds include:

  • Expense ratios can be high because they require a large number of transactions 
  • They are unreliable because they have unpredictable returns

Fixed Deposit

Also known as term deposits, these financial instruments offer investors a higher interest rate on their investments until the maturity date. 

They are sold by banks, credit unions, or savings institutions. Higher interest rates make up for low liquidity. 

Also, they can have terms ranging from one week to five years, but cannot be redeemed early. 

However, investors cannot withdraw or terminate their investments without the risk of fines. 

Term deposits are attractive to low-risk and conservative investors because they are very safe

Advantages of term deposits include:

  • Fixed interest rate during the investment period
  • they have the least risk 
  • Have high-interest rates compared to other investment options
  • they do not have a fixed deposit amount

However, they also have disadvantages, including

  • In the event of an exit, investors may lose interest earned or be charged a penalty
  • Although they have higher interest rates, they do not account for rising inflation

Similarities Between Arbitrage Funds and Term Deposits

  • Both are low-risk investment types

The difference between arbitrage funds and fixed deposits

Definition

Arbitrage funds are equity-focused mutual funds that are ideal for risk-averse investors looking to profit from volatile markets. Term deposits, on the other hand, refer to financial instruments that offer investors a higher interest rate on their investments until the maturity date. 

Risks Involved

The risks involved in arbitrage funds include high expense ratios (because they require a lot of trading) and unreliability (because they have unpredictable returns). On the other hand, the risks involved with term deposits include the inability to withdraw the investment without losing the interest earned or being charged a penalty. 

Interest Rate

Arbitrage funds have high-interest rates, while term deposits have low-interest rates. 

Fluidity

Arbitrage funds have higher liquidity. Term deposits, on the other hand, are less liquid. 

Arbitrage Funds and Term Deposits Summary

Arbitrage funds are equity-focused mutual funds that are ideal for risk-averse investors looking to profit from volatile markets. They have high-interest rates and higher liquidity. 

Term deposits, on the other hand, refer to financial instruments that offer investors a higher interest rate on their investments until the maturity date. 

Investors should be keen before committing to a fixed deposit, as they may not be able to withdraw their investment without losing the interest earned or being charged a penalty. However, both are low-risk investment types. 

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