Arbitrage Funds - 2025 Guide
The arbitrage funds have been of great interest to Indian investors, especially those who want their money to be invested in an alternative to the traditional debt and equity mutual funds. Such hybrid mutual funds employ a distinct strategy of realizing returns by taking advantage of the short-run differences in prices of equity and derivatives markets. With the financial markets changing in 2025, it would be important to know the mechanics of the arbitrage funds, their relevance today and how it would fit your portfolio.
What is an Arbitrage Fund?
An arbitrage fund is a mutual fund which earns money off the difference in price between the cash market (spot) and the futures market. The spot market may be used when fund managers purchase stocks but at the same time sell futures contracts of the same stocks. The price differentiation is a return when the two trades are squared off at expiry.
Did you know?
The latest SEBI reports indicate that the stock arbitrage funds in India as of March 2025, handle a total of more than [?]1.6 lakh crore - this is a testament to their increased popularity among conservative investors.
The Arbitrage Funds in India: How These Operate?
The arbitrage funds work on the principle of straightforward working. The fund also buys and sells the future when a stock in the cash market is underpriced in relation to the stock in the future market. The positions are closed at expiry and the profit is locked in as a spread.
- Fund managers are always in search of mispricing in markets.
- This is done through high portfolio churn and automated systems in order to take advantage of these short term opportunities.
- Usually, 65 percent or above of the corpus is invested in equity based products, the remaining is retained in debt or money market products to control the liquidity and returns.
People also ask
Are arbitrage funds risk free investments?
No, although these funds will reduce market risk, they cannot be considered as totally riskless since they are subjected to alterations in spreads and liquidity risks.
Highlights or Major Characteristics of Arbitrage Funds
- Taxed as equity funds provided 65 percent or above of funding is in equities.
- This can be considered safer than pure equity funds in a volatile market.
- Get the stock market benefits and fixed income returns.
- Normal redemption would be four working days plus.
- Appropriate when it comes to short-term investments, typically not more than one year.
What are the Conts and Pros of the Investment in Arbitrage Funds?
Pros of Arbitrage Funds
- Less volatile than the traditional equity funds because of hedge mechanism.
- Tax efficiency The tax treatment of long-term gains (more than one year) is 10 percent.
- Swift financing of investors through redemption and SWP options.
- Applicable in excess cash parking during the uncertainty in the market.
Cons of Arbitrage Funds
- The performance is highly reliant on the volatility in the market and price differences.
- Reduced returns under arbitrage characteristics.
- Performs poorly during times when interest rates are high in the market.
- The temporary loss may be caused by sudden market corrections.
Expert insight
Mr. Ashish Nehra, a reputed financial planner, says that the returns of the arbitrage funds in 2025 will be appealing relative to the ultra-short-term debt funds, however, the investor should tone the expectations and rotate the fund performance in the quarter.
How will the Taxation on Arbitrage Funds be in 2025?
According to tax laws (treated as equity funds when equity allocation is over 65 percent)
- Short term capital gains (STCG) on the holdings of less than one year is taxed at 15 percent.
- The LTCG exceeding [?]1 lakh is subjected to tax of 10 percent, and not indexed.
People also ask
What is the difference between the taxation of arbitrage funds with debt funds?
The arbitrage funds have better taxation compared to debt funds whose gains are taxed at slab rates after three years.
Who Is The One That Should think about Arbitrage Funds?
- Low risk, stability in investment Conservative investors.
- Investors who have short to medium term, typically 3-12 months.
- Parkers who put in excess money on a temporary basis and yet demand high returns than the bank FDs or bank savings.
- Tax-conscious and tax optimisation NRIs.
Did you know?
The unstable repo rates maintained by RBI in 2025 rendered the fixed income instruments very volatile forcing corporates and HNIs to transfer a part of their idle money into the arbitrage mutual funds.
What are the Arbitrage Fund Returns in 2025?
The returns of the arbitrage funds are based on the fluctuations in the market. For example:
| Year | Average Arbitrage Fund Return | Average Liquid Fund Return |
|---|---|---|
| 2022 | 4.8 percent | 4.1 percent |
| 2023 | 5.1 percent | 4.5 percent |
| 2024 | 5.8 percent | 5.2 percent |
| 2025* | 5.6 to 6.2 percent (range) | 5.8 percent |
According to AMFI estimates of April 2025.
People also ask
Arbitrage funds: does it work against inflation?
They usually match the inflation but are not geared towards aggressive growth.
The comparison between Arbitrage Funds, Liquid and Debt Funds is as follows
| Criteria | Arbitrage Fund | Liquid fund | Short Term Debt Fund |
|---|---|---|---|
| Primary Risk | Spread risk | Interest rate | Credit risk |
| Mean Return | 5.5 to 6.2 percent | 5.0 to 5.8 pct | 6.0 to 7.2 percent |
| Tax Treatment | Equity fund rules | Debt fund rules | |
| Ideal Tenure | 3 to 12 months | 1 to 6 months | 1 to 3 years |
| Volatility | Low | Very low | Moderate |
Expert insight
According to Ms. Priya Shah, Mutual Fund Specialist, arbitrage funds might not necessarily perform better than conventional debt products, but their taxation at equity level and low rate of interest sensitivity are key attractants in 2025.
What are the Limitations and Risk of Arbitrage Funds?
- Reliance on presence of arbitrage in the market.
- During low market volatility, shrinking proliferates.
- NVA may be impacted by the redemption pressure in the immediate market declines.
- Final returns can be consumed by expense ratios when they are not managed.
People also ask
Is it true that arbitrage funds are subject to credit risk?
A minor amount can be invested in debt instruments that might have marginal credit risk but this is usually minimal.
The Right Arbitrage Fund to 2025
- Test three-year annualised returns and market phase stability.
- Check reputation of fund house, track record of fund manager and AUM size.
- Evaluate cost of capital and minimum capital.
- Assess standards of liquidity and transparency.
Did you know?
Some of the major AMCs in India such as the SBI Mutual Fund and the ICICI Prudential have now introduced the instant redemption facility of their arbitrage funds across the Metro cities, thus even easier to the retail and corporate clients.
Investment Strategies arbitrary Fund investing in 2025
The 2025 technology-oriented strategy is effective in the case of arbitrage funds. Fund managers deploy:
- Algorithms of automated trading to execute at a faster rate.
- Risk monitoring systems embedded in the trading system.
- Diversification of portfolio between equity and short-run debt of high rating.
- Real-time surveillance of mispricing chances of nse and bse stock pairs.
Expert insight
The total arbitrage fund inflows in terms of the total hybrid mutual funds inflows as given by SEBI in April 2025 review is almost 25 percent; in contrast to the previous year.
Quick Recap or TLDR
- Arbitrage funds are mutual funds that are hybrid and that are guided by the price differentiation in the equity markets aimed at generating stable returns.
- Appropriate when you are interested in high efficiency in terms of taxation, and the investment is not long term and involves less risk than pure equity mutual funds.
- In 2025, most returns will primarily be as a result of market volatility and opportunity gaps, with the expected returns being between 5 and 6.2 percent.
- There should always be consideration of previous performance, tax, expense ratio, and experience of managers before making decisions.
People Also Ask
Q1: Are arbitrage funds safe in 2025?
A1: The arbitrage funds are not risky compared to most equity funds though there are some market volatility and liquidity abrupt risks.
Q2: Which is more appropriate to invest in arbitrage funds or debt funds now?
A2: Arbitrage funds are more tax efficient, but short-term debt funds can perhaps provide moderately higher yields when interest rates are high.
Q3: How long should the holding period of arbitrage funds in India be?
A3: According to most experts, it takes 3 to 12 months to get maximum returns, not holding it over a year has better tax advantages.
Q4: Does arbitrage funds have the ability to make me lose money?
A4: This practically never happens, except when there is an extreme corrective in the market, or when arbitrage opportunities temporarily disappear.
Q5: Who not to invest in arbitrage funds?
A5: Arbitrage funds may not suit the requirements of those seeking high returns, growth that is equitability-like, or very low costs per investment.
Sources
- AMFI India - Fund Details 2025
- SEBI Mutual Funds FAQs
- ICICI Prudential AMC Educational Resources
- Mutual Fund Arbitrage SBI Mutual Fund Information
