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Investing in mutual funds offers a wide range of options to cater to different risk appetites and financial goals. One such option is an arbitrage fund, which allows investors to benefit from price differences in different markets. Unlike traditional equity funds that seek Read more... long-term capital appreciation through stock price growth, arbitrage funds aim to generate risk-free returns by simultaneously buying and selling securities in different markets.
These funds are particularly beneficial during volatile market conditions, where price discrepancies between the spot market and futures market are more frequent. They also provide an opportunity for investors who want to earn moderate returns with relatively lower risk. In this article, we will explore arbitrage funds, their working mechanism, key features, different types, and suitability for various investors. Read less
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Name
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AUM
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1Y Returns
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|---|---|---|---|
ICICI Pru Equity - Arbitrage Fund (IDCW) Hybrid|Arbitrage Fund Buy |
₹26917.78 cr. | 7.18% | |
|
ICICI Pru Equity - Arbitrage Fund (G) Hybrid|Arbitrage Fund Buy |
₹26917.78 cr. | 7.17% | |
|
Tata Arbitrage Fund (IDCW-M) RI Hybrid|Arbitrage Fund Buy |
₹13632.99 cr. | 7.12% | |
|
ICICI Pru Equity - Arbitrage Fund (IDCW) - Reinvestment Hybrid|Arbitrage Fund Buy |
₹26917.78 cr. | 7.18% | |
|
Aditya Birla SL Arbitrage Fund (IDCW) - Payout Hybrid|Arbitrage Fund Buy |
₹15895.75 cr. | 7.11% | |
|
Tata Arbitrage Fund (IDCW-M) RI - Reinvestment Hybrid|Arbitrage Fund Buy |
₹13632.99 cr. | 7.12% | |
|
Tata Arbitrage Fund (G) Hybrid|Arbitrage Fund Buy |
₹13632.99 cr. | 7.11% | |
|
Aditya Birla SL Arbitrage Fund (IDCW) - Reinvestment Hybrid|Arbitrage Fund Buy |
₹15895.75 cr. | 7.11% | |
|
SBI Arbitrage Opportunities Fund (IDCW) - Reinvestment Hybrid|Arbitrage Fund Buy |
₹31895.00 cr. | 7.11% | |
|
Aditya Birla SL Arbitrage Fund (G) Hybrid|Arbitrage Fund Buy |
₹15895.75 cr. | 7.11% |
An arbitrage fund is a type of mutual fund that profits from price differences in securities across different markets. Fund managers buy securities in one market where the price is lower and sell them in another market where the price is higher, thereby making a profit from the price gap.
These funds primarily invest in equities but aim to minimise risk through arbitrage strategies rather than relying on long-term stock appreciation. Since they engage in simultaneous buying and selling, they are considered relatively low-risk compared to pure equity funds. They also allocate a portion of their assets to debt securities to provide stability when arbitrage opportunities are limited.
Arbitrage funds work by capitalising on price discrepancies between two market segments, mainly the cash market and the futures market. When the price of a security differs between these markets, the fund manager executes trades to lock in risk-free profits.
For instance, if a stock is trading at ₹500 in the spot market but ₹510 in the futures market, the fund manager buys the stock in the spot market and sells it in the futures market. When the contract matures, the manager squares off the position, generating a profit of ₹10 per share.
Since arbitrage opportunities arise more frequently in volatile markets, these funds tend to perform better during periods of market uncertainty. When arbitrage opportunities are low, fund managers may allocate assets to fixed-income instruments, ensuring stable returns.
Low-Risk Investment Strategy - Since securities are bought and sold simultaneously, arbitrage funds involve minimal exposure to direct equity risk. The fund manager ensures that every trade locks in a fixed profit without market speculation.
Volatility-Based Performance - These funds perform well in volatile markets, as frequent price discrepancies create more arbitrage opportunities. However, in stable markets, they may yield returns similar to liquid or debt funds.
Actively Managed Fund - Fund managers play a crucial role in identifying arbitrage opportunities and executing trades efficiently. These funds require frequent buying and selling, making them actively managed investments.
Diversified Portfolio - Apart from arbitrage trading, these funds allocate a portion of their assets to debt instruments such as government securities, debentures, and high-quality term deposits to maintain stability.
Hybrid Fund Classification - Although arbitrage funds invest predominantly in equities, they are categorised as hybrid funds due to their exposure to both equity and debt markets.
Cash and Futures Arbitrage Funds - These funds profit from price differences between the cash market and the futures market. Fund managers buy stocks in the spot market and sell them in the futures market when the latter quotes a higher price.
Index Arbitrage Funds - These funds exploit price differences between index exchange-traded funds (ETFs) and the underlying stocks in the index. Fund managers purchase undervalued ETFs and redeem them for stocks to sell at a higher price.
Exchange Arbitrage Funds - These funds take advantage of price variations for the same stock listed on different stock exchanges. If a stock trades at ₹600 on one exchange and ₹605 on another, the manager buys from the lower-priced exchange and sells on the higher-priced exchange.
Merger Arbitrage Funds - These funds invest in companies involved in mergers and acquisitions. Fund managers buy shares of a company being acquired at a lower price and sell them after the merger is completed when the share price rises.
Arbitrage funds are well-suited for investors seeking low-risk investment options that offer better returns than traditional savings instruments like fixed deposits. These funds appeal to conservative investors who want exposure to equities but without the high volatility associated with pure equity funds. Since arbitrage funds generate profits through price differences in different markets, they are particularly effective during periods of market volatility.
These funds are also ideal for individuals looking for short- to medium-term investment options. Investors with surplus funds who wish to park their money for a few months can benefit from arbitrage funds, as they provide liquidity and are relatively stable compared to direct equity investments. Additionally, those with a low-risk tolerance but who still want some exposure to market-linked returns may consider arbitrage funds, as they maintain a balance between equity and debt investments.
Investing in an arbitrage fund through Bajaj Broking is a straightforward process. Follow these steps to start your investment journey:
Step 1: Log in or open a Bajaj Broking account - Visit the Bajaj Broking website or download the Bajaj Broking app from the Play Store or App Store. If you are a new user, complete the KYC process by submitting your PAN card, Aadhaar, and address proof. The verification process is quick and ensures compliance with regulatory guidelines.
Step 2: Explore arbitrage funds - Once your account is set up, navigate to the mutual funds section and search for arbitrage funds. Compare different options based on past performance, expense ratios, fund manager expertise, and risk levels. Bajaj Broking provides tools such as a mutual fund return calculator to help you assess potential returns and make an informed decision.
Step 3: Choose your investment mode and amount - Decide whether you want to invest through a lump sum investment or a systematic investment plan (SIP).
Step 4: Complete the payment and confirm your investment - After selecting the fund and investment mode, proceed to complete your investment. Choose from multiple payment options such as UPI, net banking, or auto-debit for SIPs. Confirm the transaction to finalise your investment in the selected arbitrage fund.
Step 5: Track and manage your investment - Once you have invested, monitor the performance of your arbitrage fund regularly through the Bajaj Broking app or website. Reviewing your portfolio periodically helps you stay updated on market trends and make adjustments if needed. Since arbitrage funds perform best in volatile markets, tracking market conditions can help you maximise returns. Staying invested for at least three months is recommended to balance out exit load charges.
By investing through Bajaj Broking, you gain access to a seamless investment platform with research-backed insights and a range of investment tools to help you make informed decisions.
Low-risk investment - Arbitrage funds involve simultaneous buying and selling of securities in different markets, reducing the risk associated with long-term equity investments. Since part of the portfolio is allocated to debt instruments, these funds offer stability compared to pure equity funds.
Liquidity and short-term investment suitability - Investors can redeem their investments relatively easily, making arbitrage funds a liquid investment option. Although they do not require long-term commitment, staying invested for at least three months is recommended to avoid exit load charges.
Profits from market volatility - Unlike traditional equity funds, arbitrage funds benefit from volatile markets. The greater the price differences between markets, the higher the arbitrage opportunities, allowing these funds to generate steady returns even during uncertain market conditions.
Hybrid investment structure - These funds balance equity exposure with debt investments, providing both growth potential and stability. The hybrid nature of arbitrage funds makes them less prone to extreme market fluctuations, making them suitable for risk-averse investors.
Arbitrage funds provide a relatively safe investment option for those looking to benefit from short-term price movements in different markets. However, investors should assess their financial goals, market conditions, and fund management quality before making an investment decision.
Before investing in an arbitrage fund, investors should assess various factors to ensure the fund aligns with their financial goals and risk tolerance. While arbitrage funds are generally considered low-risk, they still involve market dependencies and investment costs. Here are the key factors to evaluate before making an investment decision.
Market Conditions and Volatility - Arbitrage funds perform best in volatile market conditions where price discrepancies create profitable opportunities. However, in stable markets, arbitrage opportunities may be limited, leading to lower returns. Investors should consider market trends and economic conditions before allocating funds to arbitrage investments.
Fund Manager’s Expertise - The success of an arbitrage fund largely depends on the fund manager’s ability to identify and execute profitable arbitrage trades. A skilled fund manager can capitalise on market inefficiencies, ensuring consistent returns. Investors should review the track record of the fund manager and the fund's historical performance before making an investment decision.
Expense Ratio and Investment Costs - Arbitrage funds involve frequent buying and selling of securities, leading to higher transaction costs. The expense ratio of the fund plays a significant role in determining net returns. Investors should compare expense ratios across different arbitrage funds to find one that offers a balance between cost and performance.
Investment Horizon - While arbitrage funds offer liquidity, staying invested for at least three to six months is recommended to avoid exit load charges and optimise returns. Investors should consider their financial goals and time horizon before investing. Those looking for short-term gains may find arbitrage funds more suitable than equity or long-term debt investments.
Exit Load and Liquidity - Some arbitrage funds impose exit loads if investments are withdrawn within a short period. Investors should check the exit load structure before investing, especially if they plan to withdraw funds in the near future. Arbitrage funds are generally liquid, but checking the redemption terms can help avoid unexpected costs.
Despite being equity-focused, arbitrage funds are classified as hybrid funds due to their exposure to both equity and debt markets. Their taxation follows the rules applicable to equity mutual funds, provided they maintain at least 65 percent of their portfolio in equities.
Short-Term Capital Gains (STCG) - If an investor sells units of an arbitrage fund within 12 months of purchase, the gains are categorised as short-term capital gains. These are taxed at a flat rate of 15 percent, irrespective of the investor’s income tax slab.
Long-Term Capital Gains (LTCG) - For investments held beyond 12 months, long-term capital gains taxation applies. Gains up to ₹1 lakh in a financial year are exempt from tax. Any gains exceeding ₹1 lakh are taxed at 10 percent without indexation benefits.
Dividend Taxation - If an investor earns dividends from arbitrage funds, the dividend income is added to their total taxable income and taxed according to their income tax slab. Additionally, if the dividend amount exceeds ₹5,000 in a financial year, a 10 percent Tax Deducted at Source (TDS) is applied to the excess amount.
Arbitrage funds are a preferred choice for investors seeking low-risk investment options with stable returns. These funds capitalise on price differences in different market segments to generate profits while ensuring portfolio stability. Below is a list of some of the most popular arbitrage funds in India, ranked based on their five-year CAGR as of January 7, 2025.
Fund Name | AUM (₹ Crores) | CAGR 3Y (%) | Expense Ratio (%) | CAGR 5Y (%) |
Invesco India Arbitrage Fund | 18,251.89 | 7.45 | 0.39 | 6.29 |
Tata Arbitrage Fund | 12,589.05 | 7.09 | 0.30 | 6.28 |
Edelweiss Arbitrage Fund | 12,199.21 | 7.18 | 0.38 | 6.25 |
Kotak Equity Arbitrage Fund | 54,915.38 | 7.25 | 0.43 | 6.21 |
Nippon India Arbitrage Fund | 15,418.46 | 7.03 | 0.39 | 6.11 |
Invesco India Arbitrage Fund
The Invesco India Arbitrage Fund is managed by Invesco, a global investment firm with a strong presence in over 25 countries. The fund focuses on generating returns by leveraging price differences between the cash and derivatives markets. With an asset under management (AUM) of ₹18,251.89 crore, it has delivered a three-year CAGR of 7.45 percent and a five-year CAGR of 6.29 percent. The fund operates efficiently with a low expense ratio of 0.39 percent, making it a cost-effective choice for investors seeking liquidity and stability through arbitrage opportunities.
Tata Arbitrage Fund
Tata Arbitrage Fund is managed by Tata Asset Management, a well-established investment firm with over 25 years of experience. The fund has an AUM of ₹12,589.05 crore and focuses on arbitrage opportunities in the equity markets. It has provided a three-year CAGR of 7.09 percent and a five-year CAGR of 6.28 percent. With an expense ratio of 0.30 percent, the fund offers a cost-effective way to earn steady returns through arbitrage trades. It is designed for conservative investors looking for a low-risk investment option with liquidity and moderate returns.
Edelweiss Arbitrage Fund
Edelweiss Arbitrage Fund is designed to generate consistent returns by exploiting arbitrage opportunities in equity cash and derivatives markets. The fund has an AUM of ₹12,199.21 crore and offers a three-year CAGR of 7.18 percent and a five-year CAGR of 6.25 percent. With an expense ratio of 0.38 percent, the fund ensures cost-efficient management while maintaining a low-risk approach. It allocates 73.05 percent of its investments to domestic equities, including 44.34 percent in large-cap stocks, 15.16 percent in mid-cap stocks, and 4.69 percent in small-cap stocks. Additionally, 13.39 percent of the fund is invested in debt instruments, including government securities and low-risk fixed-income assets.
Kotak Equity Arbitrage Fund
Kotak Equity Arbitrage Fund is one of the largest arbitrage funds in India, with an AUM of ₹54,915.38 crore. The fund aims to generate returns by taking advantage of arbitrage opportunities across different market segments. It has provided a three-year CAGR of 7.25 percent and a five-year CAGR of 6.21 percent. With an expense ratio of 0.43 percent, the fund offers a cost-effective investment solution. Its diversified portfolio includes investments across multiple sectors, including private banking (12.57 percent), miscellaneous industries (10.10 percent), home financing (4.85 percent), and oil and gas refining and marketing (4.56 percent). The fund's extensive sectoral diversification ensures balanced risk exposure while maintaining stable returns.
Nippon India Arbitrage Fund
Nippon India Arbitrage Fund is managed by Nippon India Mutual Fund, one of India's leading asset management companies. With an AUM of ₹15,418.46 crore, the fund follows a disciplined arbitrage strategy to generate low-risk returns by exploiting price discrepancies between the cash and derivatives markets. It has provided a three-year CAGR of 7.03 percent and a five-year CAGR of 6.11 percent. With an expense ratio of 0.39 percent, the fund offers a cost-effective investment option. It is designed for investors looking for stability, liquidity, and tax-efficient returns in the arbitrage fund category.
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Yes, arbitrage funds are suitable for investors with a low-risk appetite as they involve simultaneous buying and selling of securities, reducing market exposure. They also invest in debt instruments, providing stability while offering potentially better returns than fixed deposits or liquid funds.
Arbitrage funds carry relatively low risk compared to pure equity funds as they capitalise on price differences in different markets. However, their returns can be inconsistent in stable markets with fewer arbitrage opportunities, making them less predictable than fixed-income investments.
Arbitrage funds are ideal for conservative investors looking for low-risk returns from market-linked investments. They suit individuals who want better returns than traditional savings options without significant exposure to equity market volatility. These funds also appeal to short-term investors seeking liquidity.
An example of an arbitrage fund is the Invesco India Arbitrage Fund, which focuses on risk-free arbitrage trades to generate steady returns. Other popular funds include the Tata Arbitrage Fund, Edelweiss Arbitrage Fund, Kotak Equity Arbitrage Fund, and Nippon India Arbitrage Fund.
Arbitrage funds can be a good investment option for those seeking stable, low-risk returns. They perform well in volatile markets, offering better returns than liquid funds. However, they may not be ideal for long-term wealth creation as their returns depend on market conditions.
The returns on arbitrage funds typically range from 5 to 7 percent annually, depending on market conditions. They tend to perform better during volatile market phases but may generate lower returns in stable market conditions due to fewer arbitrage opportunities.
Arbitrage funds face risks such as unpredictable returns in stable markets, higher expense ratios due to frequent trading, and dependency on market volatility. If arbitrage opportunities are limited, the fund may shift assets to debt instruments, reducing potential returns.
Yes, arbitrage funds are taxed as equity funds. Short-term capital gains on units sold within a year are taxed at 15 percent. Long-term capital gains above ₹1 lakh after one year are taxed at 10 percent. Dividends are taxed as per the investor’s income tax slab.
The investment amount depends on individual financial goals and risk tolerance. Most arbitrage funds allow lump sum investments starting at ₹5,000, while SIPs begin at ₹500 per month. Investors should consider their time horizon and market conditions before investing.
Mutual Fund Categories |
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| Debt Funds |
| Equity Funds |
| Hybrid Funds |
| Solution Oriented Funds |
Mutual Fund Sub Category |
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| Large Cap |
| Mid Cap |
| Small Cap |
| Arbitrage |
| Aggressive Hybrid |
| Banking and PSU |
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