Last Updated:July 24, 2025, 18:35 IST
Arbitrage funds are low-risk as they buy and sell shares simultaneously, earning from price gaps across markets, making returns less affected by stock price fluctuations
Arbitrage funds operate by exploiting price differences in different markets. (Representative/Shutterstock)
With falling interest rates making fixed deposits (FD) less attractive, a growing number of investors are shifting towards mutual funds. In this changing landscape, arbitrage funds have steadily gained popularity over the past couple of years, emerging as a preferred low-risk investment option with better returns.
Offering low risk and good returns, combined with tax savings and liquidity, arbitrage funds present a compelling choice for short-term investors seeking better returns than FDs.
Arbitrage funds have gained substantial popularity in recent years. In June 2025, a record-breaking more than Rs 155 billion was invested in these funds. Currently, about Rs 2,494 billion of funds are under management. This trend highlights the growing preference for arbitrage funds among investors aiming for good returns with low risk amidst stock market fluctuations.
What Are Arbitrage Funds?
Arbitrage is a strategy where the same asset, such as a stock, is bought at a lower price in one market and simultaneously sold at a higher price in another. The profit comes from the price difference between the two transactions. Arbitrage funds operate by exploiting price differences in different markets.
For instance, a stock priced at Rs 100 in the cash market might sell for Rs 102 in the futures market. A fund manager would buy the stock at Rs 100 and sell it at Rs 102, securing a Rs 2 profit without any risk.
These funds continuously monitor and capitalise on such differences, buying and selling shares simultaneously. Successful arbitrage fund management requires strong technical knowledge and the ability to make quick decisions.
What Are The Risk Factors?
Arbitrage funds carry significantly less risk compared to the stock market. This is because they involve simultaneous buying and selling of shares. Regardless of market fluctuations, the profit stems from the price difference rather than stock price movements. Consequently, these funds are considered low-risk investments.
While they do not offer very high returns, they have provided an average return of about 8 percent over the last year, surpassing many bank FD returns.
How Does It Offer Liquidity And Tax Benefits?
A notable advantage of arbitrage funds is their liquidity; investors can withdraw money when needed. Additionally, they come with tax benefits. Investments held for less than a year incur a 20 percent tax, but if held for more than a year, the tax rate drops to 12.5 percent.
In contrast, interest earned from FDs or liquid funds is taxable according to one’s income slab, making them costlier for high-income earners.
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