The Indian economy is on its track to become the 3rd largest economy in the world with a 7.4% growth rate in Real GDP in FY 2025-26 over 6.5% in FY 2024-25. This growing economic trend has resulted in a sharp increase in investor participation. By September 2025, retail participation through direct investment reached nearly 27%. With India’s given demographic and income profile, this growth also reflects a wide range of investment preferences and strategies among the investors.
Therefore, while some investors might strive for long-term growth, others might also want to capitalise on short-term profit-making opportunities. Good arbitrage funds might aid in fulfilling the short-term growth objectives. However, before looking at the best arbitrage mutual funds, understanding the meaning of the category is essential.
What is an Arbitrage Mutual Fund?
Arbitrage mutual funds aim to generate returns by exploiting the price gaps, for the same security, between the cash market and the derivatives market. It buys at a low price in the cash market and immediately sells at a high price in the derivative market to lock in profits at minimal risk.
For example, suppose the price of stock A in the cash market is ₹500. Since the future market usually carries a premium, the price of the same stock in the future market is ₹550. If X buys 10 shares of A from the cash market and sells all the shares in the futures market, he will make a profit of ₹500. This is called arbitrage.
However, conducting arbitrage operations alone requires significant experience, research, and continuous monitoring. Individual investors might not amass it all; therefore, arbitrage funds can aid investors.
Arbitrage mutual funds are classified as equity-oriented hybrid funds, where the funds must hold at least 65% in equities, according to a SEBI circular dated 16 October 2017, which makes them tax-efficient along with stable returns, especially in volatile markets.
5 best arbitrage mutual funds
The best arbitrage funds (direct growth) are classified in the table below according to their asset under management (AUM) as of 14 January 2026.
| Particulars | Kotak Arbitrage | SBI ArbitrageOpportunities | ICICI Pru Equity Arbitrage | Invesco India Arbitrage | ABSL Arbitrage |
| AUM (₹ crores) | 72,153 | 41,714 | 32,297 | 27,400 | 25,396 |
| Risk | Low | Low | Low | Low | Low |
| Expense ratio | 0.44 | 0.41 | 0.40 | 0.40 | 0.31 |
| Standard deviation (%) | 0.83 | 0.82 | 0.82 | 0.83 | 0.81 |
| Sortino (%) | 5.34 | 5.57 | 4.84 | 6.02 | 5.59 |
| Sharpe (%) | 2.26 | 2.13 | 2.09 | 2.27 | 2.24 |
| 2-year return (%) | 7.61 | 7.45 | 7.47 | 7.60 | 7.60 |
Let’s analyse the best arbitrage funds in further detail, based on the metrics mentioned in the table.
- Kotak Arbitrage: With an AUM of ₹72,153 Crore, the largest AUM, this fund targets income from pricing differences in cash and derivatives while remaining fully hedged, delivering 7.20% since its inception. The fund holds 100% investment in equities, as of 31 December 2025. However, the fund has a high standard deviation among the best arbitrage funds, indicating high volatility, and also has the highest 2-year return.
- SBI Arbitrage Opportunities: The fund has a negative net equity allocation (long equity minus short positions) of -1.03%. It might result from a number of factors. For instance, the first cause might be holding short positions. Secondly, engagement in derivatives, such as futures, can also cause a negative allocation. Finally, unsettled or margin borrowing can also contribute to a temporary negative allocation. Moreover, its risk-adjusted ratios are better than the category average, indicating an optimal risk-return balance.
- ICICI Prudential Equity Arbitrage: The risk ratios, along with the two-year return, paint a moderate picture among the best arbitrage mutual funds. Similar to SBI, the net equity allocation of the portfolio is negative (-0.53%). Both its Sharpe and Sortino are lower than the average, indicating a probable underperformance compared to the category. The beta is the same as the category that points towards regular market volatility.
- Invesco India Arbitrage: The fund has the lowest expense ratio, indicating a greater available profit margin for the investors. The net equity allocation of the fund is negative as well (-0.43%). Moreover, it also has the second-highest two-year return among the five good arbitrage funds. This fund has the highest Sortino and Sharpe ratios, indicating an optimal risk and return balance among the top five arbitrage funds. Moreover, it has also recorded the lowest volatility, indicated by its standard deviation.
- Aditya Birla Sun Life (ASBL) Arbitrage: With an AUM of ₹25,396 Crore, the fund is hedged across cash (78.38%), and debt (22.38%). This fund also carries a negative equity allocation of -0.76%. The fund delivers about 7.60% 2-year returns, one of the second-highest among the 5 best arbitrage funds, with low volatility and expense ratio.
Who Should Invest in Arbitrage Funds?
Arbitrage funds are not built for everyone. However, they might fit certain investors’ profiles. Check them out!
- Short-term conservative investors: These funds are suitable for investors who want short-term financial gains and tax efficiency without volatility influence.
- Investors looking to invest surplus money for 6-18 months: These work well for short-term investments for investing excess cash and liquidity needs.
- Investors navigating through uncertain market conditions: When the market conditions are uncertain, arbitrage funds help in capturing profits without relying on the market.
- Tax-sensitive investors with high income: Since these funds are treated as equity funds for taxation, investors can enjoy the perks of equity funds’ tax rules.
However, to choose the best arbitrage fund, there are some other factors that must be considered as well.
Factors to consider before choosing the best arbitrage funds
Discussed below are certain category-specific metrics that must be considered to choose the best arbitrage mutual fund. These metrics offer a benchmark that can suggest the nature of returns and risks recorded by a particular fund.
- Category performance: The category average return of the arbitrage mutual funds is 6.22% in one year. The top performer has recorded a one-year return of 7.56%, which is not exponentially higher than the average, indicating a possible uniform category performance. However, an analysis of other yearly averages might aid investor research and understanding of the category. The table discusses the yearly category performance of multi-asset allocation funds as of 15 January 2026.
| Tenure (years) | Category average returns (%) | Top performer (%) | Bottom performer (%) |
| 2 | 6.49 | 7.69 | 2.47 |
| 3 | 7.01 | 7.87 | 4.32 |
| 5 | 5.86 | 7.21 | 4.37 |
| 10 | 5.83 | 7.76 | 4.65 |
- Category risk: Arbitrage funds are considered a low-risk segment. Average risk measures of a category are not only helpful for comparison with fund-specific metrics but also to understand the nature of a mutual fund in general. It aids in deciding whether a particular mutual fund is within the risk appetite of an investor. The table below shows the category risk of arbitrage funds as of 31 May 2025.
| Particular | Average (%) |
| Standard deviation | 0.38 |
| Sharpe ratio | 3.52 |
| Sortino ratio | 5.47 |
| Beta | 0.15 |
| Alpha | 1.57 |
These factors can help us sort the good arbitrage funds that are suitable for our financial goals and risk appetite.
Major Advantages
Here are some major advantages of arbitrage mutual funds:
- Low volatility, stable returns: The top 5 arbitrage mutual funds record an average standard deviation of 0.38%, which highlights lower price volatility compared to equity funds.
- Risk-adjusted performance: Arbitrage mutual funds generate efficient returns per unit of risk, with a category average Sharpe ratio of 3.52 and Sortino ratio of 5.57.
- Low market dependency: The low Beta of 0.15 indicates a weak relation with the wider equity markets, making arbitrage funds suitable in volatile market phases.
- Tax-efficient for short-term investors: These funds are classified as equity-oriented funds, enjoying equity taxation, which makes them more tax efficient compared to liquid or debt funds.
Risks Involved While Investing in Arbitrage Funds
Check out the possible risks associated with investing in arbitrage funds:
- Returns depend on market allocation: Since arbitrage funds depend on price gaps between the cash market and the derivatives market, smaller gaps between volatile periods can limit gains.
- Execution and liquidity risks: Arbitrage strategies require timely execution, and any delay or rollover could impact returns.
- Limited upside potential: Even though arbitrage funds have low risk, the returns are limited. And even the top performers stay within 7.4%-7.6% in a 2-year returns cluster.
- Exposed to short-term equity movements: Although net equity allocations are near zero or negative in some cases, arbitrage funds carry risk and experience fluctuations during extreme market events.
Bottomline
The best arbitrage funds are low-risk hybrid assets that help investors capitalise on the short-term price differentials of assets operating in different markets. It utilises the concept of arbitrage, which requires heavy research and continuous monitoring to avoid unnecessary losses. Therefore, the expertise of portfolio managers is essential in this practice.
Moreover, a comparison of fund performance and risk metrics with category averages exposes key insights that can aid informed decision-making. Understanding the concept of arbitrage is also necessary for an investor to gauge the suitability of the mutual fund investment medium, given their fiscal goals and risk appetite.
FAQs
Investors might want to invest in arbitrage mutual funds since they are ideal for conservative investors who want low-risk, tax-efficient returns, for a 3–12 month horizon. These involve the simultaneous buying of securities in the cash market and selling in the futures market, to exploit price differences. These offer stability during high market volatility and provide better post-tax returns compared to bank savings accounts or short-term debt funds.
Bank Fixed Deposits (FDs) and Arbitrage Funds differ in risk, taxation, and liquidity. FDs offer guaranteed, fixed returns with low risk, whereas arbitrage funds are market-linked and offer higher, variable returns with equity-level taxation benefits (12.5% LTCG). FDs are suitable for conservative investors needing stability, while arbitrage funds are better for higher tax bracket individuals who want tax-efficient short-term growth.
The practice of simultaneously buying and selling assets in several marketplaces in order to profit from the momentary price difference between them is known as arbitrage. Assume that share A is worth ₹600 on the cash market. Furthermore, the price of stock A in the future market is ₹650. X will profit ₹500 if he purchases 10 shares of A in the cash market and sells them all in the futures market.
The nature of gains generated from arbitrage funds, that is, short-term gains, derives from the methodology adopted to get portfolio appreciation. A type of hybrid mutual fund that tends to take advantage of arbitrage opportunities is called the arbitrage mutual fund. According to a SEBI circular, arbitrage mutual funds must dedicate 65% of their total assets to equity and equity-related assets.
In order to lock in price differences, arbitrage funds usually purchase equities in the cash market and sell identical holdings in the futures market at the same time. Accordingly, their net equity exposure (long equity less short futures) is frequently near zero or may even be slightly negative if, as a result of daily rebalancing or market moves, the short holdings somewhat outnumber the long ones.
Standardised legal agreements to purchase or sell a certain asset at a fixed price on a given future date are known as futures. Since these contracts are exchanged on regulated exchanges, terms like amount, quality, and delivery date are standardised, transparent, and liquid. For instance, a trader may use futures to speculate on the future course of the stock market, while a wheat farmer may use them to lock the selling price of their grain.
The SEBI circular stipulates that an allocation of 65% of the total assets to equity and equity-related assets is required in the case of arbitrage mutual funds. Therefore, being linked to the market, arbitrage funds are susceptible to stock market fluctuations. Understanding the concept of arbitrage, along with different category-specific and fund-specific factors, can aid in making analytical and well-informed investing decisions.
