Best Arbitrage Funds Sorted by Last 3 Year Returns
About Arbitrage Mutual Funds
Arbitrage mutual funds are a type of equity-oriented hybrid fund that aim to generate returns by taking advantage of short-term price differences in different markets. These funds typically invest in both equity and derivative segments, while parking unused funds in debt or money market instruments.
The central idea behind arbitrage is the concept of “risk-free profit”, that is, profiting from price mismatches without bearing directional market risk. However, in reality, these opportunities are not entirely risk-free, as they are subject to market liquidity, execution delays, and other operational risks.
Fund managers usually identify and exploit arbitrage opportunities such as:
- Cash-futures arbitrage: Buying a stock in the cash market and selling the corresponding futures contract at a higher price.
- Inter-exchange arbitrage: Taking advantage of price differences for the same stock listed on two different exchanges.
- Merger arbitrage: Capitalising on pricing inefficiencies during mergers or acquisitions.
By systematically engaging in such strategies, arbitrage mutual funds aim to deliver relatively stable and low-volatility returns, often appealing to conservative investors during uncertain market conditions.
How Do Arbitrage Funds Work?
Arbitrage mutual funds aim to generate profits by exploiting short-term price differences in different markets, usually the cash (spot) market and the futures market. These funds primarily invest in equities, but they aim to reduce risk by simultaneously hedging positions using derivatives.
Mechanics: Cash and Futures Market Example
Let’s say a stock is trading at ₹1,000 in the cash market. At the same time, its futures contract is priced at ₹1,020. The fund manager buys the stock in the cash market and sells the same quantity in the futures market.
On the settlement date, the futures contract expires, and both transactions are closed. If the prices converge at ₹1,010, both positions cancel each other out, but the fund earns the ₹20 spread (₹1,020 – ₹1,000) per share, which becomes the return.
Role of Derivatives
Futures and options are essential tools in arbitrage funds. They are used not for speculation but to hedge the fund’s equity positions. By selling futures against a stock holding, the fund locks in a profit regardless of how the stock price moves, minimising the impact of market volatility.
The spread, the price difference between the cash and futures markets, is the key source of return in arbitrage strategies. These differences may be small individually but can accumulate into meaningful gains over time when executed at scale.
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.
- Tax Efficiency – One of the major advantages of arbitrage mutual funds is their favourable tax treatment. Although the risk level is comparable to debt funds, they are taxed as equity funds. This means that if you stay invested for over 1 year, the gains qualify as long-term capital gains (LTCG) and are taxed at only 12.5% on gains exceeding Rs. 1.25 lakh annually, which is lower than the rate for most debt fund gains. This tax benefit enhances post-tax returns for investors.
The Risk Involved in Arbitrage Funds
While arbitrage mutual funds are considered lower risk compared to pure equity funds, they are not entirely free from risks. Investors should be aware of the following potential risk factors:
- Unpredictable Returns – Arbitrage funds rely on market inefficiencies. During stable or low-volatility market conditions, these price differences may disappear, making arbitrage opportunities scarce. In such situations, the fund may behave more like a short-term debt fund, offering lower returns.
- High Expense Ratio – Arbitrage strategies involve frequent buying and selling, which can lead to higher transaction costs and, consequently, a higher expense ratio. Although a lower expense ratio is ideal, it should be considered alongside other factors like historical performance and risk management.
- Liquidity Risk – A portion of the arbitrage fund is invested in short-term debt or money market instruments, which may face liquidity issues in stressed market conditions. If the fund manager is unable to sell these instruments quickly, it can impact redemptions or returns.
- Execution Risk – Arbitrage strategies depend on simultaneous trades in different market segments. Any delay, slippage, or error in trade execution, especially in fast-moving markets, can reduce or eliminate the expected profit from the spread.
- Interest Rate Risk – The small debt component of the portfolio is exposed to interest rate fluctuations. Rising interest rates may reduce the market value of existing debt instruments, potentially impacting overall fund performance.
- Regulatory Risk – Changes in regulations, such as taxation norms or rules governing derivatives and futures trading, can affect the functioning and profitability of arbitrage funds. For instance, amendments in tax treatment or restrictions on derivative exposure could reduce the fund’s tax efficiency or limit available arbitrage opportunities.
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?
- Conservative Equity Investors
- Ideal for those who want equity exposure but with minimal risk.
- These funds provide safer access to stock markets through hedged positions.
- Returns are more stable compared to pure equity funds.
- Suitable for investors uncomfortable with high volatility but seeking better returns than fixed deposits.
- Short-Term Investors (3-6 Months)
- Good option for those looking to park surplus funds for a short period.
- Returns may be better than traditional liquid or ultra-short-term debt funds, especially in volatile markets.
- Recommended to stay invested for at least 3 months to avoid exit load.
- Offers liquidity with lower tax implications compared to debt funds if held longer.
- Tax-Sensitive Investors
- Arbitrage funds are taxed like equity funds, offering lower LTCG tax (12.5% after 1 year).
- More tax-efficient than most debt mutual funds for medium-to-long-term holding.
- Ideal for investors in higher tax brackets seeking short-term instruments with better post-tax returns.
- Helps balance portfolio with tax-smart investments.
- Risk-Averse First-Time Mutual Fund Investors
- A good starting point for beginners entering mutual funds.
- Offers market-linked returns with limited downside due to hedging.
- Provides experience with equity markets without high exposure to volatility.
- Balances risk with the stability of debt allocation.
- Investors Seeking Portfolio Diversification
- Useful in diversifying a debt-heavy or equity-heavy portfolio.
- Adds stability during market swings without shifting completely to debt.
- Works well in combination with other mutual fund types.
- Suitable for achieving short-term goals without derailing long-term planning.
How to Choose the Best Arbitrage Fund?
Selecting the right arbitrage mutual fund involves evaluating several key factors to ensure it aligns with your investment goals, risk tolerance, and time horizon. Here are the main points to consider:
- Fund Performance Consistency – Look for arbitrage funds that have consistently delivered stable returns across different market conditions. While past performance does not guarantee future results, steady returns during both volatile and calm periods can indicate efficient fund management.
- Expense Ratio – Since arbitrage involves frequent trades, transaction costs can be high. Choose a fund with a reasonable expense ratio, as higher costs can eat into your net returns. However, don’t select a fund based on expense ratio alone, consider it along with performance.
- Assets Under Management (AUM) – A moderate to large AUM typically indicates investor confidence and better liquidity. Very small funds may face challenges in executing large trades efficiently, while very large funds may struggle to find enough arbitrage opportunities.
- Fund Manager Experience – Arbitrage strategies require precision and speed. A seasoned fund manager with expertise in equity and derivatives markets is better equipped to identify and act on arbitrage opportunities effectively.
- Investment Horizon and Exit Load – Check the minimum recommended holding period and exit load structure. Some funds may charge an exit load if you redeem within 30 to 90 days. Choose a fund that aligns with your short-term liquidity needs and investment horizon.
- Portfolio Transparency and Allocation – Review the fund’s portfolio to ensure it primarily engages in arbitrage strategies and maintains a balanced allocation in equity, futures, and debt instruments. Transparency in monthly factsheets is also a good sign of fund discipline.
By carefully assessing these factors, you can select an arbitrage fund that suits your financial objectives while managing risk and ensuring tax efficiency.
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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