When markets swing sharply, most investors get cautious — but Arbitrage Funds thrive in such conditions. Using a market-neutral strategy, they convert short-term price gaps into consistent, low-risk returns, making them one of the most reliable options for short-term parking of funds.
If you're looking for stable, tax-efficient, and low-risk mutual funds, this guide explains what an arbitrage fund is, how it works, when it performs best, and the top arbitrage mutual funds to consider in 2025.
What Is an Arbitrage Fund?
An Arbitrage Fund is a type of equity mutual fund that earns returns from price differences between the cash market and futures market. This is known as spread arbitrage, and it does not depend on market direction.
Example of how arbitrage works:
- Buy a stock in cash market at ₹100
- Sell the same stock in the futures market at ₹102
- The ₹2 spread becomes the fund’s return
This hedged equity strategy ensures low volatility and minimal risk, making it a popular alternative to liquid funds, overnight funds, and ultra-short-term debt funds.
How Do Arbitrage Funds Make Money?
Arbitrage opportunities emerge when the futures price is higher than the spot price. Fund managers lock in this cash–futures spread, generating returns without taking exposure to market ups and downs.
Because they maintain 65%+ equity allocation, they enjoy equity taxation — a major advantage over many debt-oriented short-term instruments.
Why Arbitrage Funds Are Gaining Popularity?
1. Low-Risk, Market-Neutral Strategy
Arbitrage Funds do not bet on market movement. They simply exploit market inefficiencies, making them ideal for conservative investors.
2. Equity-Like Tax Benefits
Short-term investors benefit the most:
- Short-term capital gains: 20%
- Long-term (after 1 year): 12.5%
This makes arbitrage funds more tax-efficient than many short-term debt funds.
3. A Smart Choice for Volatile Markets
Higher volatility = wider spreads = better returns. This is why many investors shift to arbitrage during uncertain periods.
4. Ideal for Parking Surplus Funds
If you want to park money for 3–12 months, arbitrage funds often deliver better post-tax returns than savings accounts, liquid funds, and FDs.
5. Zero Credit or Duration Risk
Unlike debt funds, they don’t lend money or take interest-rate risk — returns come purely from hedged positions.
When Do Arbitrage Funds Perform Best?
Arbitrage Funds generally deliver stronger returns when:
- Markets are highly volatile
- Futures premiums are higher
- Global or domestic events cause price swings
- Intraday spreads widen
- Trading volumes spike
If you’re searching for safe short-term investment options during turbulent times, arbitrage funds rank high.
Who Should Consider Arbitrage Funds?
These funds suit investors who want:
- A safe, low-risk investment
- Tax-efficient returns for short holding periods
- Better alternatives to liquid or ultra-short funds
- A place to park money before entering equity markets
- A buffer against volatility
If you're debating arbitrage fund vs liquid fund, choose arbitrage when volatility is high and tax efficiency matters.
Top 3 Arbitrage Mutual Funds to Consider in 2025
These schemes have shown strong consistency, efficient spread capture, and reliable short-term performance:
1️⃣ UTI Arbitrage Fund
The scheme is having around 80% arbitrage portfolio and rest invested into debt segment . The expanses ratio is 0.79% for regular plan which is one of the better in the peer group
2️⃣ SBI Arbitrage Fund
Managing AUM around 40000 Crores and debt portion investment into money market and liquid fund. The fund delivered around 6.50% return in the last 1 year (17 Nov 2025)
3️⃣ Kotak Arbitration Fund
Managing AUM of more than 72000 Crores.. Debt portion is managed by the money market and liquid funds reduce the debt allocation risk.
Important Things to Know Before Investing
✔ Returns Can Vary Month to Month
Spreads depend on volatility, so expect slight fluctuations.
✔ Exit Load May Apply
Most arbitrage funds charge an exit load for 30–60 days. Plan a holding period of at least 3 months for meaningful returns.
✔ Not a Long-Term Wealth Creator
These funds focus on capital protection, not high growth.
For short-term and tax-efficient goals, Arbitrage Funds often lead the pack.
Final Takeaway
Arbitrage Funds offer a rare combination: low risk, tax efficiency, and stability, especially when markets are unpredictable. If you're seeking a short-term, low-risk mutual fund that makes volatility work in your favour, arbitrage funds deserve a place in your portfolio.
They are simple, effective, and built for investors who want steady, predictable returns without market tension.
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