Arbitrage Fund

Investments

An arbitrage fund exploits simultaneous price differences between the cash and futures market for the same stock. Always hedged, practically risk-free. Returns 6-7.5% with equity fund taxation -- more tax-efficient than FDs for 30% bracket investors.

In detail

Taxed as equity fund: LTCG 12.5% after 12 months, STCG 20% under 12 months. Returns improve when markets are volatile (wider arbitrage spreads). Ideal for parking money for 1-3 year goals in the 20-30% tax bracket instead of FDs taxed at slab rate.

Formula

Arbitrage spread = Futures price - Spot price

Real-life example

🇮🇳 India example

Reliance spot Rs 2,850, futures Rs 2,875. Fund buys spot and sells futures locking Rs 25/share profit regardless of market movement. Annualised approximately 10.5% for that month.

Frequently asked questions

Arbitrage fund vs liquid fund? ▼

Arbitrage funds are more tax-efficient for 20-30% bracket investors holding 12+ months. Liquid fund returns taxed at slab rate. Arbitrage LTCG taxed at only 12.5%.