Arbitrage Fund
An equity-oriented fund that captures the price difference between a stock's cash and futures market prices, producing low-risk returns that are typically a notch above liquid funds over 12+ month horizons, with equity taxation.
Context & Practical Application
What is an Arbitrage Fund? (Simple Terms)
An arbitrage fund earns from a price gap, not a market call. It buys a stock in the cash market and simultaneously sells it in the futures market; when the two prices meet at expiry, the difference is locked in.
Returns are steady rather than spectacular, typically a notch above liquid funds. If your emergency fund is ₹2.88 Lakh, only the layer you will not need for 12 months belongs here.
Understanding Arbitrage Funds
The edge is the cash-futures spread, harvested across many stocks, repeatedly. Equity taxation applies: gains held beyond a year are taxed at 12.5% above the annual ₹1.25 Lakh exemption, often less than the slab rate you pay on a liquid fund.
Treat arbitrage as the last tier of an emergency fund: size the first months of cover with the Emergency Fund Calculator and park only the surplus you can leave for a year.
Mathematical Analysis of Arbitrage Funds
Each hedged position locks in the spread between the two prices:
Annualized across a rolling book, the spread is the gross yield; expenses, slippage and basis moves eat into it. Spread levels are cyclical (wide when futures trade rich, thin when they are not) and returns are not guaranteed. Hold it a full year: equity tax treatment depends on the holding period.
Referenced In Guides & Comparisons
Learn how Arbitrage Fund is applied in real-world scenarios across our pathways: