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A list of Best Arbitrage Funds in India with High Returns

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Created on
January 18, 2023


What’s Inside

Nowadays, young investors are breaking free from traditional investment practices and embracing the best arbitrage funds in India. This mindset shift is primarily associated with the rising popularity of mutual funds. Years ago, the norm was to keep cash in a bank savings account — even though it barely generates 3-4% interest.

Now, young and affluent investors opt for liquid (short-term) funds to park their surplus cash and beat the interest you get through a bank account. Arbitrage funds fall under a similar category, and the best arbitrage funds in India can help you surpass even FD returns. Read on.

What is an arbitrage fund?

Arbitrage funds fall under hybrid mutual funds and work on the concept of arbitrage profits. Arbitrage fund returns are generated by trading the same underlying security across multiple markets. 

Consider this: You bought 10 gm of gold in Delhi at ₹51,000. Let's say the same purity and weight of gold gets sold in Jaipur at ₹52,200. If you were to sell the gold you own in Jaipur, you would net ₹1,200 in profit without using any unique business strategy. This is how arbitrage works, minus the cost of any logistics or physical movement, as the entire market is virtual. 

It is low-risk, in some cases — negligible to nil risk. Arbitrage funds are bought when the prices are low in one market and sold at a high in another market. Both these trades are made almost simultaneously. Therefore, there is virtually no exposure to the risk of change in price movements.

So, an arbitrage fund uses stocks, commodities, and other underlying assets to generate returns for its investors with a high level of hedging from market volatility.

Noteworthy factors of the best arbitrage funds

Arbitrage funds in India are popular due to a variety of reasons. Here are some of the prominent ones.

Little to no price risk

Arbitrage funds are free from the risk associated with changes in the price of stocks or commodities, any credit risk commonly associated with liquid funds, and even counterparty risk that can creep into the settlement of futures and options contracts. It's why this type of fund is an excellent hedge for your portfolio and offers (almost) guaranteed returns with low to no risk.

Better returns than banks

Arbitrage fund returns are, historically, known to be superior to bank savings account returns. Maybe some banks might offer comparable or higher FD returns, but that money is locked in for a fixed tenure. While this lock-in doesn't exist in arbitrage funds, it is worth knowing if there is any exit load on the fund you wish to invest in. An exit load is usually levied when the units are redeemed within less than 12 months of the date of purchase.

Taxation benefits

Another area where arbitrage funds trump debt funds or bank accounts is the taxation area. Arbitrage funds are treated like equity funds and taxed accordingly under the brackets of short-term capital gains (STCG) taxes or long-term capital (LTCG) gains taxes. While the former is levied at 15% + taxes for units redeemed within 1 year of purchase, the latter is applicable on gains made after 1 year is complete and only if the amount is over ₹1,00,000. In both these conditions, the taxation is far less than the tax you will need to pay on a similar amount gained through bank interest or debt fund returns. 

Lower expense ratios

An expense ratio (ER) can be considered a fee that is charged by the fund house instead of the services it provides and the salaries of its core team, such as the fund manager and research analysts. This ER is shared by all unit holders of the scheme and gets deducted from their net gains. Naturally, the higher the ER, the lesser your returns will be. Keep this in mind while choosing the best arbitrage fund to invest in.

Who should invest in arbitrage funds?

You must now be in a good position to understand what an arbitrage fund is and how it works. Based on this, it is easy to paint the portrait of the type of investor these funds are suitable. For those who:

  • Fall under higher tax slabs (20% and above)
  • Value low-risk and guaranteed income more 
  • Want higher returns than banks
  • Have surplus cash to park for a short-term period (3-12 months)

List of the Best Arbitrage Funds in India

Here is a list of some of the best arbitrage funds in India based on their historical performance, returns, and protection against market risks.

Note: This list is for explanatory purposes only. Investors are advised to conduct thorough research and compare arbitrage funds before investing in one.


The popularity that mutual funds have gained has been immense with all kinds of funds available, and with the Fi app, you can get access and invest in any mutual fund of your choice in a few easy steps. However, ensure you know the risks involved in investing and do your research before choosing the fund.

Frequently asked questions

Which is the best arbitrage fund?

The best arbitrage fund is the one that helps you get better returns while maintaining a similar low-risk level. Several such funds are available, with 5 of the most popular ones listed above. Before investing, you should read the terms and conditions carefully and compare based on parameters such as returns, expense ratio, consistency of performance, risk level, and exit load.

Is it good to invest in an arbitrage fund?

Investing in arbitrage funds is a good idea for those with extra cash parked in their bank accounts. Bank accounts provide low interest and are taxed based on your overall income tax slab. Instead, you may place money in an arbitrage fund wherein it can generate, possibly, better returns while giving you superior tax benefits. Do not invest in arbitrage funds if high, long-term returns are your ambition. You will be better off investing in an equity or balanced advantage fund.

How do I choose an arbitrage fund?

When choosing an arbitrage fund:

  1. Look for a fund with a consistent track record of generating stable returns through arbitrage strategies.
  2. Consider factors such as the fund's expense ratio, past performance, fund manager's expertise, and the overall risk profile that aligns with your investment goals and risk tolerance.

What is the average return on arbitrage funds?

The average return on arbitrage funds can vary, but they typically aim to provide relatively stable and lower-risk returns. Historically, the average annual returns of arbitrage funds have ranged between 5% to 8%, depending on market conditions and the specific strategies employed by the fund.

Also Read:

Top equity mutual funds to invest in | Fi Money

Mutual Funds Vs. Different Investment Methods|Fi.Money

Best Short Term Mutual Funds to Invest in 2023 | Fi Money

Gross investment vs Net investment - advantages and disadvantages of both


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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