Investing in the financial markets is becoming increasingly popular among people from all walks of life as a passive income source. With the evolving markets and newer innovative investment products, more people are investing and getting creative with their strategies. However, often people consider investing in products like ELSS and mutual funds as a simple wealth-growing asset. Following the tips of seasoned investors, one of the key aspects of trading is to create a well-rounded portfolio with minimised risk. Thus, making special assets like ELSS and Arbitrage funds a powerful asset to diversify one’s portfolio and boost returns.
Let’s dive deeper into the specifics of these less-known but critical financial assets that you must have on your watchlist.
What are ELSS and Arbitrage funds?
When we think of ELSS, most people consider them as a simple tax-saving option under Section 80C. However, these special mutual funds can be more than just a tax-saving investment. With a three year locking period and potential tax-saving benefits, investors can use ELSS funds to diversify their risk and boost their returns
Arbitrage funds are a special kind of fund that is quite unique in its design and risk profile. Built on top of the idea of arbitrage, i.e. capitalising the price difference of an asset in different markets. The mutual funds have a considerably low-risk profile and a short investment timeline. Also, the underlying products for these funds are usually financial derivatives or high-volume trade equities.
Managing risk with arbitrage funds
Stock investments are quite exciting and intriguing, particularly for the innovative trading strategies and methods traders use to maximise returns. One among those is arbitrage, where the investor is trying to take advantage of price discrepancies in different markets. These can be any commodity or financial product and are a relatively low-risk trading strategy. Though it is not a very common occurrence, by strategically tracking the price fluctuations and market situation, investors identify potential gaps. Using an arbitrage fund is a great way to manage the risk of your portfolio. Since the funds have low-risk exposure and less volatility, it can help bring down your overall portfolio risk. Moreover, these funds have a slightly lower return than conventional equity funds, they are more stable and easier to manage.
If you wish to take advantage of these investment funds and explore further possible diversification options, you can combine the two. By using both funds in conjunction in your portfolio, you can boost your returns and get a tax benefit with ELSS. And use arbitrage investments to provide stability and consistent low-risk returns. Therefore, improving your investment profile and giving you better risk tolerance.
While both of these investment funds have various benefits, they are still subject to market factors. Moreover, with ELSS there are investment limits to claim tax benefits for each financial year. Therefore, before employing any investment strategy and hedging position, make sure you do your research. Understand your investment goals, risk appetite and financial profile before making any investment decisions.