Parag Parikh AMC’s Arbitrage Fund: Strategies and Benefits

In the ever-evolving landscape of investment opportunities, the Parag Parikh Arbitrage Fund (PPAF) emerges as a promising option for those seeking steady income and relatively low-risk investment strategies. This open-ended scheme, offered by Parag Parikh Financial Advisory Services Ltd., is currently open for subscription until October 27, 2023, with allotment scheduled for November 2 and reopening on November 3, 2023. But what sets the PPAF apart, and why might it be a wise choice for certain investors? Let’s delve into the world of arbitrage funds and explore the key objectives of this intriguing investment opportunity.

Understanding Arbitrage Funds

Arbitrage funds, such as the Parag Parikh Arbitrage Fund, specialize in capitalizing on price differentials between the cash (spot) market and the futures market. The Parag Parikh AMC explains that these funds often undertake a specific form of arbitrage known as “Cash Futures Arbitrage.” This strategy involves simultaneous transactions of buying and selling the same quantity of a security in both the cash market and the futures market. The ultimate aim is to profit from the price variations between these two market segments.

Here’s an illustrative example from the AMC’s website to clarify the concept:

1. Purchase equity shares of XYZ for Rs. 300 on September 15, 2023.
2. Simultaneously, sell a Futures contract of XYZ expiring on September 28, 2023, for Rs. 305.
3. On September 28, 2023, the spot and futures prices converge.

The result? A relatively ‘low-risk’ profit of Rs. 5 can be earned. The Parag Parikh Arbitrage Fund aims to replicate this process by engaging in simultaneous buy and sell transactions in both spot and futures markets whenever feasible. The objective is to generate ‘low-risk’ pre-tax profits for its unitholders.

Main Objectives of Arbitrage Funds

Steady Income Generation: One of the primary goals of arbitrage funds is to provide investors with a source of regular income. By leveraging the price differences between the cash and futures markets, these funds aim to generate profits that translate into consistent returns for unitholders.

Low Risk Exposure: Arbitrage funds are often characterized by their ‘low-risk’ profile. They seek to minimize exposure to market fluctuations by engaging in arbitrage strategies that rely on price differentials rather than market direction. This makes them an attractive option for risk-averse investors.

Capital Preservation: While generating income is crucial, capital preservation is equally important. Arbitrage funds prioritize protecting the invested capital while also aiming to deliver returns. This balanced approach helps investors maintain the security of their principal amount.

Who May Invest in Parag Parikh Arbitrage Fund?

The Parag Parikh Arbitrage Fund may be an excellent fit for investors interested in generating income through arbitrage opportunities within the cash and derivatives segment of the equity market. If you’re seeking a relatively low-risk investment with the potential for steady returns, this fund might align with your financial objectives. The scheme carries a “low-risk” label, signifying its conservative approach to capital preservation and income generation. To make this investment accessible, units of the Parag Parikh Arbitrage Fund can be purchased with a minimum investment of Rs. 1,000 and in multiples of Re 1 thereafter. Furthermore, the scheme offers the flexibility of a minimum monthly Systematic Investment Plan (SIP) of Rs. 1,000. The minimum redemption allowed is Rs. 1,000 or 1 unit or account balance, whichever is lower, providing investors with an easy exit strategy.

In conclusion, the Parag Parikh Arbitrage Fund presents an opportunity for those seeking consistent income with a ‘low-risk’ investment strategy.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.