Arbitrage funds: Low-risk, tax-efficient option, enter with 6-month horizon

Arbitrage funds have become increasingly popular due to their low-risk nature and tax efficiency. With a 6-month investment horizon, these funds offer strong post-tax returns

Arbitrage funds received net inflows of approximately ₹15,702 crore in May 2025, taking their assets under management (AUM) to ₹2,33,963 crore. This is far higher than their AUM of ₹69,311 crore in May 2020 and attests to their growing popularity.

 

How they work

 

These hybrid funds generate returns by simultaneously buying equities and selling futures in the derivatives market. “These funds try to capture the price differential between the two markets,” says Harsha Upadhyaya, chief investment officer, Kotak Mahindra Asset Management Company.

 

Futures generally trade at a premium due to the cost of carry. A part of the