Best Arbitrage Mutual Funds in India (2026)
Arbitrage mutual funds aim to generate returns by capturing price differences between the cash (spot) and futures markets of stocks. The fund typically buys shares in the cash market and simultaneously sells corresponding futures contracts to lock in the price difference.
These funds maintain at least 65% exposure to equity and equity-related instruments, which allows them to be taxed as equity-oriented mutual funds.
Top 10 Best Arbitrage Mutual Funds in India Based on Returns, Ranks & AUM
AUM Growth of Arbitrage Mutual Funds - May 2026
In the past one month, the Kotak Arbitrage Fund Direct Growth has emerged as the leader in net AUM growth, witnessing an impressive addition of ₹2.58K crore. This positions it as one of the top-performing Arbitrage mutual funds in terms of investor interest and fund growth.
Fund | 1M Net Flow | 1M Net Flow % | Action |
|---|---|---|---|
 Kotak Arbitrage Fund Current AUM: 69.95K Cr | +₹2.58K Cr | 3.62% | Invest |
 SBI Arbitrage Opportunities Fund Current AUM: 42.85K Cr | +₹1.64K Cr | 3.70% | Invest |
 Tata Arbitrage Fund Current AUM: 21.82K Cr | +₹1.06K Cr | 4.96% | Invest |
 Invesco India Arbitrage Fund Current AUM: 27.32K Cr | +₹844.84 Cr | 2.96% | Invest |
 ICICI Prudential Equity Arbitrage Fund Current AUM: 32.3K Cr | +₹839.18 Cr | 2.54% | Invest |
Top Stock added by Arbitrage Mutual Funds - May 2026
Over the last month, State Bank of India has been added to the portfolios of 14 out of 40 Arbitrage mutual funds. This signals growing confidence in the stock’s long-term growth prospects among Arbitrage fund managers.
Fund | 1M Net Flow | Action |
|---|---|---|
 HDFC Arbitrage Fund Wholesale Increased shares by 376.64% | +₹279.03 Cr | Invest |
HDFC Arbitrage Fund Increased shares by 376.64% | +₹279.03 Cr | Invest |
Tata Arbitrage Fund Increased shares by 13.50% | +₹74.92 Cr | Invest |
Kotak Arbitrage Fund Increased shares by 6.45% | +₹60.89 Cr | Invest |
 Aditya Birla Sun Life Arbitrage Fund Increased shares by 40.24% | +₹37.68 Cr | Invest |
Top Stock sold by Arbitrage Mutual Funds - May 2026
In contrast, HDFC Bank Ltd has been sold by 11 of 40 Arbitrage mutual funds in the last one month. This shift underscores a cautious approach by fund managers toward the stock, reflecting changing market dynamics.
Fund | 1M Net Flow | Action |
|---|---|---|
Kotak Arbitrage Fund Decreased shares by 30.17% | -₹1.14K Cr | Invest |
Tata Arbitrage Fund Decreased shares by 18.70% | -₹330.13 Cr | Invest |
 Mirae Asset Arbitrage Fund Decreased shares by 71.76% | -₹91.94 Cr | Invest |
 Bandhan Arbitrage Fund Decreased shares by 11.57% | -₹44.7 Cr | Invest |
 UTI Arbitrage Fund Decreased shares by 5.59% | -₹33.03 Cr | Invest |
Sector allocation of Arbitrage mutual funds - May 2026
Over the last 6 months, Arbitrage category has seen increased allocation towards Communication, Financial Services, Health sectors and allocation in Securitize, Tech, Utilities sectors has decreased
Sector | AUM |
|---|---|
 Financial Services Increased by 15.51%, in last 6M | 1.35L Cr |
 Basic Materials Increased by 3.81%, in last 6M | 42.06K Cr |
 Consumer Cyclical Decreased by 3.44%, in last 6M | 32.83K Cr |
 Industrial Increased by 1.30%, in last 6M | 30.29K Cr |
 Energy Decreased by 2.63%, in last 6M | 23.66K Cr |
 Communication Increased by 51.27%, in last 6M | 23.17K Cr |
 Consumer Defensive Decreased by 7.57%, in last 6M | 20.53K Cr |
 Health Increased by 4.73%, in last 6M | 19.74K Cr |
 Utilities Decreased by 10.11%, in last 6M | 13.07K Cr |
 Real Estate Decreased by 4.18%, in last 6M | 6.41K Cr |
 Tech Decreased by 70.60%, in last 6M | 5.83K Cr |
 Securitize Decreased by 100.00%, in last 6M | 0 Cr |
What Are Arbitrage Mutual Funds and How Do They Work?
Arbitrage mutual funds are hybrid mutual fund schemes that seek to profit from pricing differences between different segments of the stock market.
The fund manager usually:
- Buys a stock in the cash (spot) market
- Sells the corresponding futures contract
This locks in the price difference between the two markets. The positions are generally held until the futures contract expires.
Because the equity positions are typically hedged using derivatives, the portfolio has limited exposure to overall market direction.
Returns depend on the availability of arbitrage opportunities and market liquidity.
SEBI's Classification Rule for Arbitrage Mutual Funds
Under SEBI’s mutual fund categorisation framework, arbitrage funds fall under the hybrid scheme category.
Key regulatory requirements include:
• Arbitrage funds must maintain at least 65% exposure to equity and equity-related instruments
• Equity exposure is typically hedged using derivatives such as futures contracts
• The remaining portion is generally invested in short-term government securities, treasury bills, repos, or other money market instruments
• Each asset management company (AMC) can offer only one scheme in the arbitrage fund category
Maintaining more than 65% equity exposure qualifies arbitrage funds for equity-oriented taxation.
How Do Arbitrage Mutual Funds Generate Returns?
Arbitrage mutual funds generate returns primarily from arbitrage spreads and short-term debt investments.
- Arbitrage spread
The fund buys stocks in the cash market and sells equivalent futures contracts. The price difference between the two markets creates the arbitrage opportunity.
- Debt and money market income
The portion of the portfolio not deployed in arbitrage opportunities is usually invested in short-term debt instruments such as treasury bills, government securities, or money market instruments.
Returns depend on the availability of price spreads and market conditions.
Who Should Invest in Arbitrage Mutual Funds?
Arbitrage mutual funds may be suitable for investors seeking relatively stable short-term returns with equity taxation.
They may be appropriate for:
• Investors looking to park funds temporarily before investing in equities
• Investors in higher tax brackets seeking equity-oriented taxation
• Investors with a short-term investment horizon of around 3–12 months
Investors should consider their financial goals, investment horizon, and risk tolerance before investing.
Arbitrage Funds vs Liquid Funds
Arbitrage funds and liquid funds are both used for short-term investments, but they differ in strategy and taxation.
Arbitrage funds generate returns from price differences between the cash and futures markets, while liquid funds invest in short-term debt instruments with maturities of up to 91 days.
Because arbitrage funds maintain at least 65% equity exposure, they are taxed as equity-oriented funds. Liquid funds are debt funds taxed according to the investor’s income tax slab.
| Feature | Arbitrage Funds | Liquid Funds |
|---|---|---|
| Strategy | Cash–futures arbitrage | Short-term debt instruments |
| Asset Allocation | ≥65% equity (hedged using derivatives) | Debt and money market instruments |
| Risk Profile | Limited directional equity exposure | Low interest-rate risk |
| Taxation | Equity-oriented taxation | Taxed at income tax slab |
| Typical Horizon | Around 3–12 months | Few days to a few months |
| Liquidity | Usually T+2 redemption | Usually T+1 redemption |
Benefits of Arbitrage Mutual Funds
Arbitrage funds offer several structural features that distinguish them from other mutual fund categories.
- Equity-oriented taxation
Because the portfolio maintains more than 65% equity exposure, arbitrage funds are taxed as equity funds.
- Limited exposure to market direction
The equity positions are typically hedged using derivatives, which reduces exposure to broad equity market movements.
- Short-term investment option
These funds are often used by investors looking for alternatives to short-duration or liquid funds with different tax treatment.
Risks of Arbitrage Mutual Funds
Arbitrage mutual funds also involve certain risks.
- Arbitrage opportunity risk
Returns depend on the availability of price differences between the cash and futures markets.
- Interest rate risk
The debt portion of the portfolio may be affected by changes in interest rates.
- Expense ratio impact
Active trading and portfolio management may increase the cost of managing the fund.
- Lower return potential compared with equity funds
Since the strategy focuses on capturing small price differences, returns may be lower than diversified equity mutual funds over long periods.
Investors should consider these risks before investing.
Frequently Asked Questions
Arbitrage funds aim to profit from price discrepancies between different markets by simultaneously buying and selling the same asset.
Since arbitrage funds buy and sell simultaneously, the risk associated with long-term investments is mitigated. Plus, they have some stake in debt instruments, making them a suitable investment for risk-averse investors.
Arbitrage funds exploit price differences between markets to make profits by buying and selling the same asset simultaneously. Liquid funds, on the other hand, invest in short-term, low-risk instruments like treasury bills and commercial papers to provide high liquidity and preserve capital. While arbitrage funds focus on capturing price inefficiencies for returns, liquid funds aim for safety and easy access to cash.
The risk with arbitrage funds is a high expense ratio, swift changes in interest rate and unpredictable payoffs. Moreover, the profit margins are generally small in these funds.
These funds fall into the equity-oriented hybrid fund category, where they allocate the majority of their portfolio to equity and equity-related investments, while the remainder is invested in debt securities.
The profits of an arbitrage fund depend mainly on the number of arbitrage opportunities in the market and the fund manager's skill in taking advantage of them. These opportunities are more frequent during volatile markets and scarce in calm ones. Despite this, arbitrage funds generally offer better returns than fixed deposits and liquid funds.
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