Top Performing Arbitrage Mutual Funds to Invest in 2022

8 min read • Published 29 October 2022
Written by Nishant Prasad
Keep reading to know about India's best arbitrage mutual funds

Investors may find it difficult to understand the concept of arbitrage in financial markets and, thus, avoid investing in arbitrage mutual funds. This blog will detail how an arbitrage mutual fund works and list the top-performing funds.

The word arbitrage refers to buying something in one place and selling it elsewhere where the price is higher. In doing so, the person conducting the arbitrage aims to profit from this transaction. However, more importantly, he does so without changing any part of the item, which can be a stock, currency, commodity, or other tradable items.

What Are Arbitrage Mutual Funds?

Arbitrage mutual funds are open-ended hybrid schemes that allocate 65 percent of their portfolios to equity and related instruments. These hybrid funds also keep a smaller portion of their corpus in high-quality debt and cash instruments.

Arbitrage funds leverage price differences of the same underlying asset between the cash and the futures markets to generate returns. Returns from these funds depend on the price volatility of their underlying assets. These funds tend to carry low risks as arbitrage allows mostly risk-free profits.

List of 10 Best Arbitrage Funds in India 

Below is a list of some top-performing arbitrage funds in India that we have illustrated in a tabular format: 

Name of the Arbitrage Fund 5-Year Annualised Returns
Nippon India Arbitrage Fund – Direct Plan-Growth5.74%
Edelweiss Arbitrage Fund – Direct Plan-Growth5.73%
Axis Arbitrage Fund – Direct Plan – Growth5.63%
Kotak Equity Arbitrage Fund – Direct Plan -Growth5.59%
Invesco India Arbitrage Fund – Direct Plan -Growth5.56%
Baroda BNP Paribas Arbitrage Fund – Direct Plan – Growth5.53%
L&T Arbitrage Opportunities Fund – Direct Plan-Growth5.53%
Aditya Birla Sun Life Arbitrage Fund – Direct Plan – Growth5.52%
IDFC Arbitrage Fund – Direct Plan – Growth5.50%
UTI Arbitrage Fund – Direct Plan – Growth5.50%
* Returns and NAV as of 23 August, 2022

How Does an Arbitrage Fund Work?

India has different market segments, including a cash market and a futures market. The cash market is commonly known as the stock or spot market, whereas the futures market is an equity derivatives market that features the expected future price of the securities. 

Let us say a share of the XYZ Company is available at Rs 2,000 in the cash market and Rs. 2,040 in the futures market. As there needs to be a simultaneous buy and sell, the investor needs to buy one share of XYZ industries in the cash market at Rs. 2,000 at the beginning of the month and simultaneously sell it at a higher price in the futures market at Rs. 2,040, thus generating a profit of Rs. 40. 

In a different scenario, the fund manager may buy equity shares at Rs. 100/share on the National Stock Exchange and sell them at Rs. 120/share on the Bombay Stock Exchange to produce a risk-free return.

Also Read: Arbitrage Funds- Meanings, Basics, Things to Consider & More

Who Should Invest in Arbitrage Funds?

The following kinds of investors are the ones who may prefer investing in arbitrage funds:

  • Individuals who seek more profits from their short-term investments than savings banks
  • People seeking low-risk like debt funds, but with a little equity exposure can invest in arbitrage funds.
  • Those with a short to medium-term investment horizon

What Are the Features of an Arbitrage Fund?

The features of an arbitrage fund are as follows:

  • Asset allocation- Under SEBI’s guidelines, arbitrage funds in India will have to allocate at least 65% of their corpus to equity-related instruments. Furthermore, the funds must distribute the remaining corpus into debt instruments. 
  • Potential returns- Arbitrage Funds have the potential to generate profits in a volatile market. The fund manager of these MFs tries to generate returns using price differentials in markets. To put it simply, the higher the movements in prices in cash and future markets, the higher will be the difference in prices leading to profits.
  • Risks- Arbitrage mutual funds are less riskier than equity funds because a portion of these funds invest a considerable portion of their corpus in debt instruments. It is important to know that the equity portion of these investments is subject to market volatility while the debt portion is subject to credit risk.

Read More: Liquid Mutual Funds – What Are Liquid Funds | Risk, Returns & Benefits

What Are the Advantages of Investing in Arbitrage Funds in India?

Here are a few advantages of investing in arbitrage funds:

  • Decent returns- People prefer to invest in arbitrage funds because these funds can generate better returns compared to a savings bank account. 
  • Nominal risks- These funds take advantage of the buying and selling opportunities on the stock and futures markets. These profits are risk-free, as both buy and sell transactions are executed simultaneously.
  • Options for investments- If you choose to invest in arbitrage funds, you will have the opportunity to do so via SIP or lump sum. Systematic Investment Plans allow you to invest a small fixed amount of money each month/quarter/year to buy a mutual fund. 

On the other hand, in a lump sum, you can invest a considerable value of money in one go. You can easily choose the investment mode according to your financial needs and condition. 

  • Taxable like equity funds- Capital gains from arbitrage funds are taxed in the same way as equity funds. This is because arbitrage funds invest 65% of total assets in equity-related investments. You can get tax savings of up to Rs. 1 lakh by staying invested for over a year.

Read More: Thematic Funds: Meaning, How They Work & How to Invest

What Are the Risks Associated with Arbitrage Funds?

Here are certain risks that are associated with arbitrage funds:

  • Credit risks- SEBI allows fund houses to invest up to 35% of their assets in debt or money market products for arbitrage funds. Credit risks may exist with some of these instruments. Therefore, if you wish to invest in these funds, you must examine the credit quality of these debt instruments.
  • Market conditions- The current market conditions determine arbitrage funds’ returns. Fund managers will be forced to trade at a discount value in the futures market during extreme bear phases. Arbitrage is tough in very bearish conditions as fund houses cannot take part in short selling.

Taxability of Arbitrage Funds

As stated earlier, the capital gains from arbitrage mutual funds are taxed in the same way as equity funds. Below is a table that will illustrate the taxability of arbitrage funds:

Capital GainsHolding Period Taxation 
Short-Term Capital Gains Less than a year Taxed at 15% 
Long-Term Capital Gains A year or moreTax-free for gains below Rs. 1 lakh. Gains above Rs. 1 lakh are taxed at 10% 

Things You Should Remember before Investing in Arbitrage Mutual Funds

Below are certain things that you should remember before you invest in one of the above-mentioned top arbitrage funds:

  • Investment goals- If your financial goals are short to medium-term and you want to pay for an expensive designer bag, a new car or an international trip, then an arbitrage fund will suit you. You can also hold your money under these funds for a short time and wait to gain high returns, which can act as your emergency fund. 
  • Expense ratio- You should consider a fund’s expense ratio, which the fund houses will charge from you annually, before investing. The expense ratio is the cost that fund houses charge for managing your funds on your behalf, including the fund managers’ remuneration. 

Fund houses can also levy an exit load for 30 to 60 days to deter investors from making an early withdrawal. As a result, the cost of your expense ratio can increase, and your take-home returns will decrease. 

  • Investment period- If you are looking for a fund to park your money for 3 to 5 years, then an arbitrage fund will be appropriate for you. Furthermore, you should only consider these funds if you are prepared to hold your investment for at least three to six months because they include exit loads. Please be aware that the presence of extreme volatility has a significant impact on fund results.

Final Word

Before choosing an arbitrage fund to invest your hard-earned money in, you must evaluate these funds from all angles. There are many qualitative and quantitative factors that you need to consider. Hopefully, the detailed guide on arbitrage mutual funds and the list will help you make informed decisions before investing. 

FAQs about arbitrage mutual funds

Are Arbitrage funds tax efficient?

While Arbitrage funds do offer tax benefits as compared to debt funds, they are not necessarily the most tax-efficient mutual funds. To save tax, one can invest in Equity Linked Savings Scheme (ELSS) mutual funds that qualify for Section 80C deductions.

Is it safe to invest in arbitrage funds?

Arbitrage funds, like fixed-income funds, have a low-to-moderate risk profile. These are suited for investors with modest risk tolerance.

How is an arbitrage mutual fund different from an aggressive mutual fund?

Arbitrage and the aggressive mutual fund are a type of hybrid mutual fund that invests their corpus in both equity and debt instruments. The difference is arbitrage funds invest up to 65% of their total assets in equity and related instruments and the rest in debt funds. 

On the other hand, aggressive funds may invest up to 65% to 80% of their corpus in equity. The remaining amount it invests in debts. Furthermore, aggressive funds generate higher returns and are riskier than arbitrage funds.

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Nishant Prasad

Chief Compliance Officer
Nishant is a qualified lawyer from NALSAR University of Law, Hyderabad having 8+ years of experience and is the Chief Compliance and Legal Officer at Wint Wealth. He has been working in the finance and wealth management space for the past 5+ years and is an NISM certified mutual fund expert. He has previously worked for Khaitan & Co and Scripbox.

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