An Arbitrage Fund is a type of mutual fund that earns returns by taking advantage of price differences between the cash (spot) market and the futures market.

The fund typically buys a stock in the cash market and sells the same stock in the futures market at the same time. This locks in a small price difference as profit.

Because both buy and sell positions are taken together, the strategy is largely market-neutral, meaning it is not heavily affected by whether the market goes up or down.

In India, arbitrage funds are generally considered relatively low-risk compared to pure equity funds. They are often used by investors looking for stable, short-term returns, and can be more tax-efficient than traditional debt funds.

A fund identifies that Infosys is trading at ₹1,600 in the cash market and ₹1,610 in the futures market. The fund buys the stock in the cash market and sells it in the futures market, locking in a ₹10 difference per share.

Over time, as prices converge, the fund earns this spread as profit. Such trades are repeated across multiple stocks to generate consistent returns.

For example, funds like Kotak Equity Arbitrage Fund use this strategy to aim for steady returns with relatively lower risk.

• 2008 – Post Financial Crisis Shift
After the global financial crisis, investors in India became more cautious about equity market volatility, increasing interest in lower-risk strategies like arbitrage funds.

• 2010s – Tax Advantage Recognition
Arbitrage funds were classified as equity funds under Indian tax laws, making them more tax-efficient compared to debt funds and increasing their popularity.

• Present Day – Popular Short-Term Parking Option
Arbitrage funds are widely used by investors to park short-term money while still earning market-linked returns with relatively lower risk.