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Invest in the best Arbitrage funds iin 2022

In order to produce arbitrage returns, arbitrage funds use hybrid mutual fund strategies that take advantage of pricing discrepancies between the same underlying assets in several capital market segments. Also available for investment are debt and money market products. This article aims to list down the best arbitrage funds.

There is no dearth of opportunities in mutual fund investment when it comes to generating superior returns. In the mutual fund arena, each fund scheme comes with a unique proposition that investors can utilize based on their financial situations, goals, and risk profile. Among them are arbitrage funds that propose to generate profit for the investors by exploiting the market inefficiencies. These funds buy one security from a particular market and sell the same in a different market to generate profit from the price difference and thus justify their name arbitrage. These funds help you profit from the market without taking too much risk in your investment.

Best Arbitrage funds in 2022 in India

The following table shows some of the best arbitrage funds and their returns over the years.

Scheme Name
Direct plan - Growth option
AUM(Rs. crores)1 year(Absolute return)3 years(CAGR)5 years(CAGR)
ICICI Pru Equity - Arbitrage Fund14,076.754.09%4.79%5.57%
Aditya Birla SL Arbitrage Fund8,323.694.11%4.88%5.62%
Baroda BNP Paribas Arbitrage Fund621.083.86%4.90%5.65%
Edelweiss Arbitrage Fund6,838.434.46%5.16%5.85%
HDFC Arbitrage Fund6,722.433.88%4.55%5.24%

Who should invest in arbitrage funds?

Arbitrage funds identify low-risk opportunities in the cash and futures market to carry out profits, so their risk level is quite low and comparable to pure debt funds. These funds are apt for the investors who want to get an equity exposure to the equity market but are worried about the risk associated with the same. These funds offer a haven to investors to safely park their surplus money when there is relentless fluctuation in the market. Investors in higher tax brackets who want to take advantage of tax-efficient returns from equity funds can also invest in arbitrage funds. If you come within the above-mentioned criteria and have a time horizon of one to three years, you can consider investing in arbitrage funds.

Taxation of gains from arbitrage funds

The taxation of arbitrage funds is the same as equity. In case when the investor redeems the fund units before one year, gains from the sale/redemption of units are considered short the capital gains (STCG) and taxed at a rate of 15%. If the investor stays invested in these funds for more than one year, the gain generated will be considered long-term capital gains (LTCG). The long-term gains over Rs 1 lakh a year are taxed at 10% without interaction benefits. 

The risk associated with arbitrage funds 

These funds are fairly low on risk. Arbitrage funds may be volatile for short investments. But for an investment horizon of 3 months or more, the arbitrage funds perform well. Here the chances of incurring losses are low.

Return potential of arbitrage funds 

These funds are an excellent way to earn reasonable profits with lower risk. To generate returns for investors, the fund manager buys the securities from the cash market while simultaneously selling the same in the futures market. The higher the volatility in the market, the more is the opportunity to earn profits. Since the trades are at high all times, volatility is always there, thereby generating high returns. However, the returns get moderated when reached to investors due to higher transaction costs and other fund management expenses. But considering these funds are risk-free, these returns seem reasonable. 

Advantages of investing in arbitrage funds 

Investing in these funds can be advantageous in many ways. Here is a look into some of the benefits investors experience with arbitrage fund investment.  

  • Less risk: One of the biggest advantages of and what makes the arbitrage funds more attractive is the risk factor. Since these funds buy and sell the securities quickly, there is less risk of long-term investment. Also, the involvement of debt components makes these finds a more stable option for investment. In cases when the fund manager doesn't find a new opportunity in the market, they allocate major assets towards debt. This way, they maintain a constant flow of returns, and the risk stays minimal. 
  • High volatility, higher returns: Volatility is something that every investor wants to avoid as it brings about losses. But when it comes to arbitrage fund investment, the volatility is considered a boon. When the market is volatile, the price difference between the current and future is uncertain. Investors are unsure whether to buy or sell, making the market more volatile. Volatility can bring the market up or down, which leads to huge gains or losses. By identifying the right opportunity in such a situation, investors can turn the table to their advantage. For this, investing in an arbitrage fund is the best option to benefit from volatile markets.
  • Taxed as equity funds: Arbitrage funds are hybrid funds. However, when it comes to taxation, these funds are treated as equity mutual funds. That is because these funds invest at least 65% in equities as part of asset allocation, so the taxation is similar to equity funds. Short-term capital gains get taxed at a rate of 15%, and long-term capital gains (above Rs 1 lakh) at 10%. If the longer-term capital gains are below Rs 1 lakh, they are tax-free. This tax rate is lower than the income tax slab rate for investors falling under INR 2,50,000 and above.

Why should you invest in arbitrage funds?

Arbitrage funds are safer than many other debt products. Even debt funds come with credit risk, but not arbitrage funds. These funds can be an excellent opportunity to generate high returns as long as you know their in and outs. Arbitrage funds can offer returns of 7% to 8% over five to ten years. If you are looking to earn moderate returns via a portfolio with a perfect mix of debt and equity in a volatile market, then arbitrage funds are apt for you. However, it is worth noting that arbitrage funds don't guarantee returns.  


Arbitrage funds are the most unique mutual funds out there. Contrary to many mutual funds, they capitalize on the price difference between the same security in different markets, allowing investors to benefit from market volatility without taking a considerable risk. Although they sound appealing, it's imperative that, as an investor, you choose arbitrage funds based on your investment profile.  


Have more queries related to arbitrage funds? Get them all answered here. 

  1. How can I invest in arbitrage funds?
    • Ans: You can directly visit the AMC website and select your preferred fund. Else, you can take assistance from a broker or intermediary platform such as Glide invest and invest in arbitrage funds.
  2. How can I select an arbitrage fund?
    • Ans: When selecting a fund, analyzing its quantitative and qualitative perspective is imperative. For this, consulting a financial advisor can be a great help. Besides, they will help you select the best funds based on your financial goals, risk appetite, and investment horizon, making your investment a success.
  3. Are arbitrage funds tax efficient?
    • Ans: No. Arbitrage funds are not tax-efficient. However, if you want to save tax for equity exposure, you can invest in the ELSS scheme, and under Section 80C, you can avail of tax deductions.
  4. What is the best route to invest in arbitrage funds, SIP, or a lump sum?
    • Ans: Choosing a lump sum for arbitrary funds investment would make sense over SIP. These funds are highly dependent on market volatility, so when you choose a lump sum, your amount stays invested and utilized during the volatile market situation, thus helping you make the most out of your investment.

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