10 Best Arbitrage Funds – Meaning, Features, Taxation and Advantages

Last Updated on Jan 1, 2024 by Harshit Singh

When it comes to investing in mutual funds, you are spoilt for choices. Among other types of mutual funds, arbitrage funds are relatively lesser-known among investors. In this article, let’s explore arbitrage funds, their working, features, benefits, taxation and more. 

What is an arbitrage fund? 

Arbitrary, as a word, means something unrestrained or determined by chance rather than a principle or a system. Arbitrage mutual funds take root from a similar situation. At the outset, it may seem to function in an arbitrary manner, but rest assured, mutual funds rarely leave things to chance. 

An arbitrage fund takes advantage of the changing price of the securities across different markets to buy and sell the securities simultaneously to pocket the differential. An arbitrage fund may leverage the cash market and the derivative markets to generate returns. 

The volatility of the asset decides the value of the returns. Arbitrage funds help the investor make a profit by capitalising on the difference in the price of the present and future securities.

Arbitrage funds are essentially hybrid funds – meaning they invest across asset classes like equity and debt in varying proportions. These types of mutual funds appeal to investors who plan to generate revenue out of the volatile equity market but have a portion invested in the safer debt market.

Best arbitrage funds in 2023

Name AUM (Rs. in cr.) CAGR 5Y (%) Expense Ratio (%) Minimum Lumpsum (Rs.)
Tata Arbitrage Fund 7,979.86 6.06 0.29 5,000.00
Edelweiss Arbitrage Fund 7,035.52 5.95 0.37 100.00
Invesco India Arbitrage Fund 10,231.76 5.92 0.37 1,000.00
Nippon India Arbitrage Fund 11,326.42 5.85 0.39 5,000.00
Kotak Equity Arbitrage Fund 28,957.71 5.84 0.43 100.00
Axis Arbitrage Fund 3,522.71 5.75 0.31 500.00
Aditya Birla SL Arbitrage Fund 6,377.22 5.74 0.36 1,000.00
HSBC Arbitrage Fund 1,766.06 5.72 0.27 5,000.00
Baroda BNP Paribas Arbitrage Fund 457.15 5.72 0.38 5,000.00
UTI Arbitrage Fund 3,955.13 5.70 0.38 5,000.00

Note: The data is as of 1st January 2024 and derived using Tickertape Mutual Fund Screener with the following parameters: 

  • Category: Hybrid Funds > Arbitrage Funds

CAGR 5Y: Sorted from high to low

How do arbitrage funds work?

​​As an investor, you must only invest in what you understand. That is the primary principle to successful investing. 

Let us understand how arbitrage mutual funds work with the help of a simple example. 

The equity share of a company, XYZ, trades in the cash market at Rs. 1,500 and in the future market at Rs. 1,515. The fund manager would buy shares of this company at Rs. 1,500 from the cash market and immediately set a future contract (in the futures market) to liquidate them at Rs. 1,515. When the prices coincide, the sell order of the shares in the future market at Rs. 1,515 is executed. This generates a risk-free return of Rs. 15 for every share, less the transaction costs. 

In another situation, let us assume the fund manager feels that the prices may fall in future. They capitalise on the situation and enter into a long contract in the futures market. In such a scenario, they will short-sell your shares at Rs. 1,515 in the cash market. At the time of expiry, they will also execute a buy order of the shares at Rs. 1,500 in the futures market to earn a profit of Rs. 15 per share and cover their position. 

Another way of working with arbitrage funds is that you have the option of purchasing an equity share of Rs. 100 at the NSE and liquidating it at the BSE at Rs. 120 to get a profit without taking any risk.

Features of arbitrage funds

Let’s have a look at the key features of arbitrage funds:

  • Arbitrage funds are mutual funds that come with the purpose of providing their investors with a balance of risk and return. 
  • These are actively managed funds and generate profit by trading on different stock exchanges.
  • These types of funds are not affected negatively by fluctuations in market prices.
  • They keep their investors stress-free because the buying and selling prices are already known to the fund manager, turning the market uncertainty and instability into a blessing for the investors. 
  • Arbitrage funds help investors avoid a majority of the risks associated with equity market volatility while giving investors the opportunity of investing in equity.
  • Another very important feature of arbitrage funds is that they are very popular among investors with low-risk capacity.  
  • When the arbitrage opportunity is low, the fund manager allocates a part of the pooled investor capital into choice debt instruments that would generate a profit and have a high credit quality, like debentures, government bonds and term deposits.

So the money is always working in a safer environment to grow into a corpus over time. Arbitrage funds may be volatile in the short term but have historically returned at par with liquid funds over the long term.

Who should invest in arbitrage funds?

As we have seen, the primary feature of arbitrage funds is that they encash low-risk buy-and-sell deals in the futures and cash markets. You can easily equate the level of risk involved in these funds with the risk involved in pure debt funds.

Therefore, these funds are best suited for investors who wish to take advantage of the equity market without having to deal with the high risk associated with it. Thus, if you are someone who is averse to risk but exploring options to generate higher returns than from the debt market, arbitrage funds may be considered and take advantage of the market fluctuations.

Things to consider while investing in arbitrage funds

There are certain crucial things that you need to take care of as an investor are:

  • Risk involved: As there is no second party involved in this trade and it is conducted solely on the stock market, it is free of counterparty risks. You are not exposed to price fluctuations in equities, even when selling or buying shares in cash or future markets. However, though it is a safe investment, it is still advisable to be careful while investing in arbitrage funds. Every market-linked product comes with inherent risks. In that sense, arbitrage funds are not risk-free investments. With more people trading in the arbitrage market, price-differential opportunities tend to reduce. The fund manager would have to invest in different types of debt funds to get low but assured profits. 
  • Return: Arbitrage funds can actually get you a decent profit if you can pick the right fund to invest in. Traditionally, these funds have given investors 7-8% returns over a time span of 5-10 yrs. Though there is no guarantee of the returns on these funds, they are great, low-risk options in a volatile market.
  • Cost of investment: You will have to bear a cost when investing in arbitrage funds, known as the expense ratio. It is an annual fee that mutual funds charge towards the management of your money. Expressed as a percentage of the assets of the fund, it includes the fund management charges, fund manager fees, administration, research and communication charges, and commissions and brokerages. Also, to discourage investors, the fund, at times, levies an extra load for 30 to 60 days, which would further add to the expense ratio of your fund.

Taxation on arbitrage funds

Arbitrage funds are treated just as equity funds for the purpose of taxation. You make short-term capital gains (STCG) if you stay invested for a time period of less than a year, which are taxable at the rate of 15%. Your gains will be considered long-term capital gains (LTCG) if you stay invested for more than a year. Such LTCG on arbitrage funds are taxed at 10%.  

Advantages of investing in arbitrage funds

The key benefits of arbitrage funds are listed below:

  • Low risk: The primary benefit of arbitrary funds is that they rank very low in the risk-o-metre. The buying and selling rates are already known to the fund manager, who can manage associated risks. A part of arbitrage funds also goes to debt securities, which are usually very stable.
  • Liquidity and lock-in: There is no long-term commitment involved as the securities are simultaneously bought and sold. However, given the higher exit load charges, it may make sense to stay invested for at least three months in a volatile market period. That said, all funds tend to perform the best over the long term.
  • Taxed as equity funds: Arbitrage funds invest primarily in equities. This is why they are taxed as equity funds, and the tax rate is much lower for them than the ordinary income tax rate levied on other types of funds, such as gold ETFs or debt funds. 
  • Flourish in a volatile market: Arbitrage funds are the only funds that practically flourish when the market is volatile. 
  • Balanced funds: Another benefit of arbitrage funds is that they are balanced funds and are a hybrid of both debt and equity, with a focus on equity, thus capturing the benefits of both asset classes.

Arbitrage funds vs FD 

Here’s a table to explain the difference between arbitrage funds and Fixed Deposits (FD). 

Feature Arbitrage Fund FD
Returns Returns are linked to the market. Hence not guaranteed. Assured returns based on the bank/financial institution rate. 
Risk High risk compared to FDs Low-risk
Taxation STCG is taxed at 15%, and LTCG is taxed at 10%.  The interest earned is added to the investor’s income and taxed as per their income tax slab. 
Premature withdrawal An exit load is levied if the fund is withdrawn within 30 or 60 days of buying. A premature withdrawal fee is levied as per the bank/financial institution’s norms. 


Overall, arbitrage funds come with both pros and cons. It is important for an investor to analyse and understand the working of a fund before investing. Use Tickertape Mutual Fund Screener to analyse different mutual funds available in the market. Once you’ve invested in your preferred fund, use Tickertape Mutual Fund Portfolio, which can help to keep an eye on the fund with crucial parameters. 


What does arbitrage fund mean? 

Arbitrage funds are hybrid funds that generate returns by simultaneously buying and selling securities in different markets to make use of different prices.

For how long should you stay invested in arbitrage funds? 

Given its volatility in the short run and to save on taxes, you can stay invested in arbitrage funds for more than a year. However, it is important to consider your investment objective and stay invested accordingly.  

Anjali Chourasiya
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