When markets swing wildly, most investors look for safe havens. While fixed deposits and debt instruments offer stability, they often compromise on returns. Enter arbitrage funds—a unique category of mutual funds that combines the safety of debt with the potential of equity. But what exactly is an arbitrage fund, and how does it compare to equity mutual funds?

What is an Arbitrage Fund?

An arbitrage fund is a type of mutual fund that takes advantage of price differences in the cash and derivatives markets. In simple terms, it buys stocks in the cash market and simultaneously sells them in the futures market at a higher price. This locks in a risk-free profit, regardless of market volatility.

For example, if a stock trades at ₹1,000 in the cash market and ₹1,010 in the futures market, the fund manager buys in cash and sells in futures, earning ₹10 per share. These small gains add up over time, making arbitrage funds a low-risk option.

Why Choose Arbitrage Funds?

• Low Risk: Since positions are hedged, the risk is minimal compared to pure equity funds.
• Tax Advantage: Arbitrage funds are treated as equity for taxation purposes, meaning short-term gains are taxed at 15% and long-term gains at 10% after one year.
• Better Than Liquid Funds in Volatile Markets: When markets are choppy, arbitrage opportunities increase, often leading to better returns than traditional debt funds.

Arbitrage Funds vs Equity Mutual Funds

While both fall under the equity category for tax purposes, they serve different purposes:

• Equity Mutual Funds aim for long-term wealth creation by investing in stocks without hedging. They carry higher risk but also higher return potential.
• Arbitrage Funds focus on short-term, low-risk gains through hedged positions. They are ideal for conservative investors or those parking surplus funds for a few months.

If you’re looking for aggressive growth, equity mutual funds are your go-to. But if you want stability with decent returns during market uncertainty, arbitrage funds make sense.

Who Should Invest in Arbitrage Funds?

• Investors with a low-risk appetite
• Those seeking better returns than savings accounts or liquid funds
• People looking for tax-efficient short-term investments

Final Thoughts

Arbitrage funds are not about chasing high returns—they’re about smart, low-risk investing when markets are unpredictable. They offer a unique blend of safety and tax efficiency, making them a great option for short-term parking of funds. However, remember that returns depend on market volatility; in calm markets, gains may be modest.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.