Arbitrage Funds

Arbitrage mutual funds are a type of equity-oriented hybrid fund that aims to earn from price differences of the same stock in different markets.

These funds make use of such short-term price gaps between markets. For example, if a fund manager notices that XYZ stock is priced lower in the cash market and slightly higher in the futures market, they'll buy it in the cash market and sell it in the futures market.

Because of this strategy, arbitrage funds carry very low risk and are often preferred by conservative investors looking for short-term parking options with better tax efficiency than traditional debt funds.

Arbitrage mutual funds earn from the price difference between the cash market (where stocks are bought and sold instantly on exchanges) and the futures market (where stocks are traded for a future date).

In simple terms, fund managers buy a stock in the cash market and later sell the same stock in the derivatives market at a slightly higher price. On the parallel side, they imply a strategy of buying and selling stock among the different exchanges as well. In the end, the difference between these two prices becomes their earnings, which are generally locked in and not affected by daily market ups and downs.

To maintain this balance, these funds generally invest at least 65% of their assets in equities and equity-related instruments. However, in the absence of arbitrage moments, the fund manager may park the money in debt and short-term money-market securities to maintain the fund's stability and liquidity.

More or less, Arbitrage mutual funds can suit those:

• Conservative Investors seeking low-risk investment options with better returns than traditional fixed deposits.
• Short-Term Investors are trying to park funds for a period of 3 to 6months.
• High-tax-bracket investors looking for tax-efficient alternatives to debt funds or FDs, since arbitrage funds are taxed like equity funds (with lower rates).
• Those risk-adverse individuals want to benefit from market volatility without taking on significant risk.

Planning to invest in Arbitrage Mutual Funds online?

With Anand Rathi, you can explore and invest in top-performing arbitrage funds through a secure, paperless, and hassle-free process.

Here's how you can get started in just 5 simple steps:

Visit the Anand Rathi platform or download the AR Invest app to create your account.

Fill in the required details, and complete quick and easy paperless KYC verification within minutes.

Browse and compare from a range of arbitrage mutual funds, backed by research and considerable ratings.

Select your preferred fund, investment amount, and payment mode – SIP or Lumpsum.

Monitor performance, fund rates (%), NAV (Net Asset Value), and portfolio updates, all in one place.

Before you invest, keep these key points in mind:

• Market Conditions - Arbitrage opportunities tend to be higher when markets are volatile. In stable markets, proceeds from these funds might be relatively lower.
• Expense Ratio - Since arbitrage funds involve frequent buying and selling, look for ones with a lower expense ratio to help you retain more of your earnings.
• Exit Load - Some funds charge a small exit load if you withdraw your money within a short period (usually 30–90 days). So, make sure your investment duration matches the fund's terms.
• Fund Performance - Always check the fund's track record, but remember that past performance doesn't guarantee future yield. Focus more on the consistency and stability of the fund’s growth rather than just high numbers.
• Fund Manager's Philosophy - Each fund manager may follow a slightly different investment style or risk approach. It's worth understanding their strategy for spotting arbitrage opportunities, how actively they trade, and how they manage liquidity.

In India, Arbitrage funds are taxed similarly to equity funds.

• Short-Term Capital Gains (STCG): If units are sold within 12 months, the achievable gains are taxed at 20%.
• Long-Term Capital Gains (LTCG): For units held longer than 12 months, gains are taxed at 12.5% LTCG. However, gains up to ₹1.25 lakh are tax-exempt.