Best Arbitrage Funds Sorted by Last 3 Year Returns
About Arbitrage Mutual Funds
Arbitrage funds earn gains by simultaneously buying and selling securities in two different markets. These markets are the spot-cash market and the futures market. The fund manager simultaneously buys shares in the cash market and sells them in futures or derivatives markets. The difference between the cost and selling prices is the return you earn. In a nutshell, arbitrage funds work by benefiting through price differences in diverse markets.
How Do Arbitrage Funds Work?
Arbitrage mutual funds are mutual fund schemes that essentially leverage the differences in prices in markets in order to generate profits. The primary aim of arbitrage funds is to deliver arbitrage profits via price differences that occur in different capital markets. Suppose the price of any security is different in different markets. In that case, mutual fund investors can make risk-free gains by buying securities in the market where the price is lower and selling the same securities in the market where the price is higher.
You could say that arbitrage funds work with a predominant investment in equities but aim to minimise risk through the strategy of arbitrage. Funds work by taking advantage of price differences between stock exchanges or market segments.
Features of Arbitrage Mutual Funds
- Since arbitrage opportunities tend to be more in the case of volatile markets, the fund is likely to generate potentially higher returns than in a stable/calm market. However, these funds are known to give higher returns than a fixed deposit.
- Managers buy and sell stocks at low risk in the futures and the cash market so they can easily calculate the kind of risk involved in arbitrage funds.
- Since the manager is actively involved in buying and selling stocks simultaneously in two markets, arbitrage funds are categorised as actively managed funds.
- They generate profit by operating in different markets.
- As the fund manager is usually aware of the buying and selling prices, the investors can remain assured even during economically volatile times.
- When the arbitrage opportunities are low, the fund manager can use the investor capital in the choice debt instruments, which can be used to generate capital and can help with high credit quality. This can be done through instruments such as government bonds, debentures, and term deposits.
- Even the best arbitrage funds can be volatile, but they’ve been known to return on par with liquid funds over the long term.
Advantages of Investing in Arbitrage Funds
- Low risk – Since securities are bought and sold simultaneously, there is less risk involved in long-term investment. Part of the arbitrage funds is also invested in debt securities, which are considered to be relatively stable. Hence, this investment option turns out to be a suitable option for investors who have a low-risk tolerance.
- Liquidity – Arbitrage funds don’t require a long-term commitment as the securities are bought and sold simultaneously. However, it would be well-suited to stay invested for at least 3 months to balance out exit load charges.
- Thrives in a volatile market – As mentioned above, the best arbitrage funds are ones that thrive during market volatility, helping investors with a steady income source.
- Balanced funds – Yet another advantage of arbitrage funds is that it is well-balanced and is a hybrid of debt and equity mutual funds. This allows the fund to have the benefits of both.
The Risk Involved in Arbitrage Funds
Here are some other risk factors involved:
- Unpredictable returns – Arbitrage funds are not entirely reliable in stable markets. In the absence of profitable arbitrage trades, this may lead the arbitrage fund to become a bond fund.
- High expense ratio – The number of trades required to make profits from arbitrage funds can bring up the expense ratio. While it will be a well-suited practice to opt for a lower expense ratio, investors must also focus on a good performance track record. The expense ratio should not be the only deciding factor when choosing an arbitrage fund.
Factors To Consider Before Investing in Arbitrage Mutual Funds
While you may think that arbitrage funds offer minimal risks, they still invest in equities, and there are certain factors you must consider before you invest:
- Consider the role of the fund manager in any fund you are considering. In any arbitrage mutual fund scheme, the fund manager identifies opportunities for arbitrage and then invests to make maximum gains. A small portion may also be invested in fixed-income instruments with a high standard of credit to maintain portfolio stability.
- There is no real exposure to equity risk as the fund manager purchases equities in one market and simultaneously sells equities in another market. Nonetheless, such opportunities may become few and far between as more and more investors attempt this kind of investment, and the price differences may be small.
- Before you invest in such a fund, it is important for investors to reflect on the costs of investment. For arbitrage funds, you will have to potentially bear expense ratio costs, and if you don’t plan to stay invested for a duration, there may be exit loads to consider.
- You may consider arbitrage funds if you have some excess money you wish to invest for a medium to long-term duration.
- The main element to consider concerns your own financial goals and plans for investment. Think of your time horizon as well as your risk tolerance. Your personal preferences and the kind of investor you are determine whether funds may be considered.
Who Should Invest in Arbitrage Mutual Funds?
Due to its nature of buying and selling at low risk in the futures and the cash market, fund managers can easily calculate the kind of risk involved in arbitrage funds.
Hence, this type of financial instrument is perfect for individuals who wish to take advantage of the market volatilities without engaging in high risk.
Taxability of Arbitrage Funds
Despite investing in equities, arbitrage funds are considered hybrid funds as they invest both in equity and debt funds. As long as equity makes up for 65% of the portfolio, they are taxed as equity funds.
When an investor earns dividends on their arbitrage fund investments, the dividends are included in their taxable income and subject to taxation based on their income tax bracket. In addition, if the dividend amount exceeds ₹ 5,000 in a financial year, a 10% Tax Deducted at Source (TDS) is applied to the excess amount.
As said earlier, capital gains of arbitrage funds are taxed as equity-oriented funds. Here’s how:
- Short-Term Capital Gains – In the case of assets owned for less than 12 months, a tax rate of 15% is applied to gains from arbitrage funds.
- Long-Term Capital Gains – If you hold the investment for more than 12 months, a long-term gain tax of 10% is applicable, without indexation on a gain of more than 1 lakh in a financial year from these funds.
How To Invest in Arbitrage Funds?
Investing in the arbitrage Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1: Log in to your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Determine an arbitrage fund that suits your needs and risk profile. You can learn more about each arbitrage fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the arbitrage fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Arbitrage Funds
| Fund Name | AUM ( in ₹ crores) | CAGR 3Y (%) | Expense Ratio (%) | CAGR 5Y (%) |
| Invesco India Arbitrage Fund | 18251.89 | 7.45 | 0.39 | 6.29 |
| Tata Arbitrage Fund | 12589.05 | 7.09 | 0.3 | 6.28 |
| Edelweiss Arbitrage Fund | 12199.21 | 7.18 | 0.38 | 6.25 |
| Kotak Equity Arbitrage Fund | 54915.38 | 7.25 | 0.43 | 6.21 |
| Nippon India Arbitrage Fund | 15418.46 | 7.03 | 0.39 | 6.11 |
Note: The top 5 arbitrage funds are as of January 7, 2025. These funds are sorted as per the 5-year CAGR.
Invesco India Arbitrage Fund
Invesco is a global investment management firm headquartered in Atlanta, Georgia. With a presence in 25 countries, the company serves clients across 120 nations and employs approximately 8,000 professionals worldwide.
The Invesco India Arbitrage Fund, with an AUM of ₹18,251.89 crore, focuses on leveraging price differentials in the cash and derivatives markets to generate steady returns. The fund’s 3-year CAGR stands at 7.45 percent, offering a return of 6.29 percent. With an expense ratio of 0.39 percent, it ensures efficient cost management while targeting low-risk, short-term gains. This fund offers liquidity, stability, and consistent performance in the relatively low-risk arbitrage space.
Tata Arbitrage Fund
Founded in 1994, Tata Asset Management Private Limited has over 25 years of experience in investment management. The firm manages the investments of Tata Mutual Fund. The Tata Arbitrage Fund, managing ₹12,589.05 crore in assets, is designed for investors seeking steady returns through arbitrage opportunities in the equity markets.
The fund offers a 3-year CAGR of 7.09 percent and a return of 6.28 percent. With an expense ratio of just 0.30 percent, it operates efficiently, focusing on price disparities between the cash and derivatives markets. This fund can be ideal for conservative investors who want a low-risk, stable option to achieve short to medium-term financial goals, combining liquidity and moderate returns from equity markets.
Edelweiss Arbitrage Fund
Edelweiss Arbitrage Fund, managing ₹12,199.21 crore in assets, offers a 3-year CAGR of 7.18 percent with a return of 6.25 percent. The fund focuses on exploiting arbitrage opportunities between the equity cash and derivatives markets to generate consistent, low-risk returns. Its expense ratio stands at 0.38 percent, ensuring that costs are kept low.
The fund allocates 73.05% of its investments in domestic equities, with 44.34% in large cap stocks, 15.16% in mid cap stocks, and 4.69% in small cap stocks. Additionally, 13.39% of the fund is invested in debt, with 3.27% in Government securities and 10.12% in low-risk securities.
Kotak Equity Arbitrage Fund
Kotak Equity Arbitrage Fund, with an AUM of ₹54,915.38 crore, is a leading arbitrage fund offering consistent performance. It has a 7-day return of 7.25% and a low expense ratio of 0.43%, making it a cost-effective investment. The fund aims to capitalise on arbitrage opportunities by buying and selling securities in different markets or forms.
The fund’s investments are distributed across multiple sectors, including private banks at 12.57 percent, miscellaneous industries at 10.10 percent, home financing at 4.85 percent, oil and gas refining and marketing at 4.56 percent, along with others at 19.81 percent. The remaining 48.11 percent is spread across 47 additional sectors, ensuring extensive diversification.
Nippon India Arbitrage Fund
Nippon India Mutual Fund is among the top mutual funds in India, managing an average assets under management (AAUM) of ₹2,79,431 Crores. It was set up as a trust under the Indian Trusts Act, 1882, with Nippon Life Insurance Company as its sponsor and Nippon Life India Trustee Ltd serving as its trustee.
Nippon India Arbitrage Fund offers a 7.03 percent return with a 3-year CAGR of 6.11 percent. The fund uses a disciplined arbitrage strategy to generate stable, low-risk returns by exploiting price discrepancies in the equity cash and derivatives markets. With an expense ratio of 0.39 percent, it maintains cost-efficiency while focusing on providing liquidity and stability.
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