Executive Summary
Arbitrage mutual funds have emerged as a compelling short-term parking solution for HNIs and family offices, offering tax-efficient returns with minimal volatility. In 2025, amid heightened market fluctuations and evolving tax norms, these funds have consistently outperformed traditional fixed income instruments like public bank FDs.
What Are Arbitrage Funds?
Arbitrage funds exploit price inefficiencies between:
Cash and derivatives markets (Time Arbitrage)
Buy ₹1 crore of ABC shares today at ₹99 and sell via futures at ₹101 after 3 months → ₹2 lakh gross gain (Time Arbitrage)
Geographic exchanges (Place Arbitrage)
Buy ₹1 crore of XYZ shares in NSE, Delhi at ₹99 and sell in BSE Mumbai at ₹100 simultaneously → ₹1 lakh gross gain (Place Arbitrage)
These strategies are executed by computer algorithms, with minimal human intervention, ensuring consistent spreads across market cycles.
Risk & Return Profile
Volatility: Standard deviation ~0.5% across top schemes
Sharpe Ratio: ~1.35–2.37, indicating strong risk- adjusted returns
Beta: ~0.60, confirming low correlation with broader equity markets
These funds are ideal for:
• 3–12 month allocations
• Tactical cash management
• Tax-optimized alternatives to liquid/ultra- short debt funds
Why Are Arbitrage Funds Gaining Traction?
AUM Surge: Category AUM tripled to ₹2 lakh crore since April 2023
Market Volatility: Arbitrage spreads widen during FII sell-offs and volatile sessions
Tax Efficiency: Equity-style taxation makes them superior to debt funds and FDs
Liquidity: T+2 redemption cycle; exit loads typically 0.25–0.50% for <30-day holding
Taxation (FY 2025–26)
Arbitrage funds are classified as equity mutual funds:
Growth Option
STCG (<12 months): 20% + 4% cess
LTCG (>12 months): 12.5% + 4% cess
Exemption: First ₹1.25 lakh LTCG per year is tax-free
NRI taxation: No TDS deductions subject to certain conditions.
Dividend Option
Taxed as per investor’s income slab
Dividend added to total income
Operational Notes
Cut-off Time: Purchase before 3 PM for same-day NAV
Redemption: Transaction +2 working days
Exit Load: Typically 0.25% if redeemed within 30 days
Final Thoughts
In the current macro environment—marked by rate uncertainty, equity volatility, and evolving tax norms— arbitrage funds offer a low-risk, tax-efficient, and algorithmically managed solution for short-term capital deployment. For HNIs and corporate treasuries seeking stability without sacrificing returns, they remain a smart tactical choice.
