⚖️ Category Deep Dive · Arbitrage Funds

Top 5 Arbitrage Mutual Funds in India

An unbiased, data-driven comparison of India's best arbitrage funds. These funds exploit price differences between cash and futures markets — delivering near-FD returns with equity taxation, making them uniquely attractive for investors in the 20–30% tax bracket.

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Live Comparison

Top 5 Arbitrage Funds — At a Glance

Click any fund for its full deep analysis — live charts, rolling returns, drawdown history and honest dark chapters.

1
Kotak Arbitrage Fund
Kotak Mahindra Mutual Fund · Direct Growth · Since 2014
NAV
1Y Return
—
3Y CAGR
—
AUM
—
Risk
Low
Deep Analysis →
2
Invesco India Arbitrage Fund
Invesco Mutual Fund · Direct Growth · Since 2006
NAV
1Y Return
—
3Y CAGR
—
AUM
—
Risk
Low
Deep Analysis →
3
Tata Arbitrage Fund
Tata Mutual Fund · Direct Growth · Since 2018
NAV
1Y Return
—
3Y CAGR
—
AUM
—
Risk
Low
Deep Analysis →
4
HDFC Arbitrage Fund
HDFC Mutual Fund · Direct Growth · Since 2007
NAV
1Y Return
—
3Y CAGR
—
AUM
—
Risk
Low
Deep Analysis →
5
ICICI Prudential Equity Arbitrage Fund
ICICI Prudential · Direct Growth · Since 2006
NAV
1Y Return
—
3Y CAGR
—
AUM
—
Risk
Low
Deep Analysis →
⚠️ Disclaimer: Returns are calculated live from AMFI NAV data and are for educational purposes only. Past performance does not guarantee future returns. RightAdvise.com is NOT SEBI registered. Not investment advice.
5-Year Growth

₹1 Lakh Invested — How It Grew

If you had invested ₹1 lakh 5 years ago, here's how much it would be worth today across all 5 arbitrage funds.

5-Year Growth of ₹1,00,000 · Direct Growth Plans · Live Data

Side by Side

Full Comparison Table

Key metrics for all 5 arbitrage funds. Returns are live calculated from AMFI NAV data.

Fund Launch Expense Min SIP Benchmark 1Y Return 3Y CAGR
Kotak Arbitrage Fund Sep 2014 0.25% ₹100 Nifty 50 Arbitrage TRI — —
Invesco India Arbitrage Fund Apr 2006 0.37% ₹100 Nifty 50 Arbitrage TRI — —
Tata Arbitrage Fund Dec 2018 0.27% ₹100 Nifty 50 Arbitrage TRI — —
HDFC Arbitrage Fund Oct 2007 0.30% ₹100 Nifty 50 Arbitrage TRI — —
ICICI Pru Equity Arbitrage Dec 2006 0.33% ₹100 Nifty 50 Arbitrage TRI — —
⚠️ Data Note: Returns are calculated from live AMFI NAV data and are for educational purposes only. Past performance does not guarantee future returns. RightAdvise.com is NOT SEBI registered.
Education

What Are Arbitrage Funds?

Arbitrage funds are SEBI-defined hybrid mutual fund schemes that profit from price differences of the same stock in the cash (spot) market and the futures (F&O) market. They simultaneously buy a stock in the cash market and sell its futures contract — locking in the price gap as near-riskless profit. Since they maintain at least 65% in equity (hedged positions), they enjoy equity taxation — a huge advantage over debt funds for investors in the 20% and 30% tax brackets.

✅ Why Arbitrage Funds Make Sense

  • Taxed as equity funds — only 12.5% LTCG after 1 year (vs. slab rate for FDs/debt funds)
  • Near-zero market risk — each equity position is simultaneously hedged in futures
  • Returns typically track short-term money market rates (7–8% p.a. in high-rate environments)
  • Superior to liquid funds for investors in 20–30% tax brackets over 12+ month horizon
  • Very low volatility — standard deviation of 0.5–1%, far lower than any equity category

⚠️ The Real Limitations

  • Returns depend on futures premium — can fall sharply when F&O spreads narrow
  • In low-volatility markets, arbitrage opportunities shrink and returns suffer
  • 0.25% exit load if redeemed within 30 days — not truly liquid like overnight funds
  • High AUM funds struggle to find enough arbitrage opportunities — returns compress
  • Not suitable if you need guaranteed returns — unlike FDs, returns are variable

✅ Who Should Consider Arbitrage Funds

  • Investors in the 20% or 30% tax bracket with a 12+ month holding period
  • Those parking short-to-medium term funds (1–3 years) wanting better post-tax returns than FDs
  • Conservative investors wanting equity taxation without equity market risk
  • Investors seeking an alternative to debt funds post the removal of LTCG indexation
  • Those building a low-risk liquidity bucket in their overall portfolio

❌ Who Should Avoid Arbitrage Funds

  • Investors in the 5% or 10% tax bracket — FDs or liquid funds may give better post-tax returns
  • Those needing money within 30 days — exit load applies before that
  • Anyone expecting equity-like capital appreciation — these are not growth instruments
  • Investors who confuse "equity-taxed" with "equity returns" — they are very different things
  • Those requiring stable, predictable monthly income — returns are variable by nature
The Mechanism

How Arbitrage Works — A Simple Example

Most investors don't understand what arbitrage funds actually do. Here is the exact mechanism, explained simply.

1️⃣
Spot the Gap
Reliance Industries trades at ₹2,800 in the NSE cash market. Its one-month futures contract trades at ₹2,830 — a ₹30 premium (the "spread").
2️⃣
Simultaneous Trade
The fund BUYs Reliance at ₹2,800 in the cash market and simultaneously SELLs the futures contract at ₹2,830 — locking in ₹30 profit per share regardless of market direction.
3️⃣
Market Irrelevant
If Reliance falls to ₹2,500, the cash position loses ₹300 but the futures short gains ₹330. If it rises to ₹3,100, cash gains ₹300 but futures short loses ₹270. Either way, ₹30 is locked in.
4️⃣
Expiry & Repeat
On futures expiry, both positions close. The ₹30 spread is realised as profit. This is done across 50–100 stocks simultaneously, every month, to generate the fund's return.
💡 Key Insight: The return from an arbitrage fund equals the annualised futures premium across the market. When markets are volatile, this premium widens and arbitrage funds earn more. In calm, low-volatility markets, premiums narrow and returns compress. This is why arbitrage fund returns vary from 5% to 9% p.a. depending on market conditions.
Tax Advantage

Arbitrage Fund Taxation vs FD

The real reason to choose arbitrage funds — the tax math is compelling for investors in higher brackets.

Scenario FD (7% p.a.) Debt Fund (7% p.a.) Arbitrage Fund (7% p.a.)
Gross Return on ₹10 Lakh (1 year) ₹70,000 ₹70,000 ₹70,000
Tax (30% slab investor) ₹21,000 (slab rate) ₹21,000 (slab rate) ₹8,750 (12.5% LTCG)*
Net Take-Home ₹49,000 ₹49,000 ₹61,250
Effective Post-Tax Return 4.9% p.a. 4.9% p.a. ~6.1% p.a.

*LTCG of 12.5% applies after 1 year holding period. First ₹1.25 lakh of gains exempt per financial year. Surcharge and cess not included for simplicity. Actual returns vary. This is illustrative and not financial advice.

Common Questions

Arbitrage Fund FAQs

Not completely risk-free, but very close. The main risk is execution risk — the gap between buying the stock and selling the futures may not always be perfectly captured. There is also liquidity risk (especially in smaller stocks), counterparty risk in the derivatives market, and return risk (returns vary with market conditions and cannot be predicted). However, the NAV of a well-managed arbitrage fund is extremely stable — it is nothing like equity funds in terms of volatility.
Liquid funds are safer for very short periods (1–90 days) and have no exit load after 7 days. Arbitrage funds have a 30-day exit load (0.25%) and are better suited for 6–12+ month horizons. The key differentiator is taxation — arbitrage funds are taxed as equity (12.5% LTCG after 1 year), while liquid fund gains are added to income and taxed at slab rates. For investors in the 20–30% bracket with a 12-month+ view, arbitrage funds typically win.
Interestingly, sharply falling markets can temporarily boost arbitrage fund returns because futures premiums often widen in volatile conditions. Since the fund profits from the spread between cash and futures prices (not the direction of the market), a volatile or declining market can actually provide more arbitrage opportunities. However, in sustained low-volatility periods — like a slowly grinding bull market — spreads narrow and returns compress.
The sweet spot is 12 months or more, to qualify for the lower 12.5% LTCG tax rate on equity funds. Holding for less than 12 months means gains are taxed as STCG at 20% — still better than slab rates for 30% bracket investors, but the advantage is smaller. Avoid redeeming within 30 days to escape the 0.25% exit load.
All arbitrage funds earn from the same market-wide futures premium pool. The differences come from: (1) expense ratio — lower expense = higher return for investor; (2) execution efficiency — some fund managers capture spreads more consistently; (3) allocation to debt portion — funds invest the cash-hedged portion in short-term debt; higher quality debt or better duration calls can add marginal returns; (4) AUM size — very large AUM funds have less flexibility to exploit smaller opportunities.
Yes, all 5 funds in this comparison accept SIPs starting at ₹100/month. However, SIPs in arbitrage funds are less commonly used because the taxation benefit requires each SIP instalment to be held for 12+ months individually. Many investors prefer lump sum investments with a clear 12-month exit horizon. That said, for those building a short-term liquidity buffer systematically, SIP works fine.
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