The Indian economy is anticipated to witness a growth rate of 6.2% in 2025 and 6.3% in 2026. Backed by a growing economic trend, investor participation has surged significantly. In February 2025, retail participation through the direct scheme rose to 26%. The significant investor participation indicates diverse investor participation as well, given the heterogeneous population blend of the country.
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.
Introducing arbitrage funds
Arbitrage refers to the simultaneous purchase and sale of assets in different markets to profit from the short-term difference in their prices. For instance, suppose the price of share A in the cash market is ₹500. Moreover, since the future market usually carries a premium, the price of stock A in the future market is ₹550. If X buys 10 shares of A from the cash market and sells all the shares in the future market, he will make a profit of ₹500. This is called arbitrage.
However, conducting arbitrage operations alone requires significant experience, research and continuous monitoring. Often, individual investors can’t amass it all. Therefore, arbitrage funds can aid investors.
A type of hybrid mutual funds that tend to take advantage of arbitrage opportunities is called the arbitrage mutual fund. According to a SEBI circular dated 16 October 2017, arbitrage mutual funds must dedicate 65% of their total assets to equity and equity-related assets.
However, understanding the meaning of the funds is not enough to choose the best arbitrage fund. Some other factors must be considered as well.
Also read: Futures Contracts: Everything You Need to Know About the Different Types
Factors to consider before choosing the best arbitrage funds
Discussed below are certain category-specific metrics which 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 6.69% in one year. The top performer has recorded a one-year return of 7.80%, 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 30 June 2025.
| Tenure (years) | Category average returns (%) | Top performer (%) | Bottom performer (%) |
| 2 | 7.16 | 8.19 | 2.73 |
| 3 | 6.73 | 7.75 | 4.14 |
| 5 | 5.48 | 6.39 | 4.11 |
| 10 | 5.81 | 8.10 | 4.81 |
- 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 | 0.54 |
| Sharpe ratio | 1.35 |
| Sortino ratio | 1.48 |
| Beta | 0.60 |
| Alpha | 1.87 |
The factors can help us sort the good arbitrage funds that are suitable for our financial goals and risk appetite.
Also read: Beyond stocks: Can mutual funds invest in options and futures
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 1 July 2025.
| Particulars | Kotak Arbitrage | SBI Arbitrage Opportunities | ICICI Prudential Equity Arbitrage | Invesco India Arbitrage | HDFC Arbitrage |
| AUM (₹ crores) | 67,362.14 | 33,759.32 | 28,443.90 | 22,340.62 | 20,685.4 |
| Risk | Low | Low | Low | Low | Low |
| Expense ratio | 0.44 | 0.40 | 0.40 | 0.39 | 0.42 |
| Standard deviation (%) | 0.57 | 0.53 | 0.53 | 0.48 | 0.54 |
| Sortino (%) | 2.10 | 1.92 | 1.82 | 2.68 | 1.67 |
| Sharpe (%) | 1.86 | 1.75 | 1.64 | 2.37 | 1.52 |
| 2-year return (%) | 8.17 | 7.93 | 7.98 | 8.09 | 7.92 |
Let’s analyse the best arbitrage funds in further detail, based on the metrics mentioned in the table.
- Kotak Arbitrage: With a PE ratio of 21.75, this fund has the largest AUM, indicating high liquidity and investor confidence. 76.47% of the portfolio is invested in cash and equivalents, and 22.91% is directed towards debt. Moreover, only 0.63% is invested in equity. However, the fund has the highest standard deviation among the best arbitrage funds, indicating high volatility. Moreover, it has the highest 2-year return.
- SBI Arbitrage Opportunities: The fund has a negative net equity allocation (long equity minus short positions) of -0.44%. It might result from a number of factors. For instance, the first cause might be holding short positions. Secondly, engagement in derivatives, 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 (-0.39%). Both its Sharpe and Sortino are lower than the average, indicating a probable underperformance than 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. 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 the most optimal risk and return balance among the top five arbitrage funds. Moreover, it has also recorded the lowest volatility, indicated by its standard deviation.
- HDFC Arbitrage: The fund has recorded the lowest Sharpe and Sortino ratios. This points towards a possible unhealthy generation of returns with the given amount of risk. However, the fund has kept most of its 21.56% debt holding unchanged. Moreover, the fund has increased most of its equity holdings while decreasing some, including a decrease in the stock that contributes the largest percentage of equity holdings, ICICI Bank (5.77%)
Also read: Unlocking the power of index futures: A beginner’s guide
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
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 future 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 funds that tend 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.
