Choosing the right investment option can be confusing. While bank Fixed Deposits (FDs) are considered safe, their returns have dropped in recent times due to lower interest rates.
This is why many people are now turning to mutual funds. In the past one to two years, arbitrage funds have become a popular choice.
These funds offer low risk and decent returns. On top of that, they provide tax benefits and liquidity.
If you’re looking to invest for the short term and want better returns than FDs, arbitrage funds can be a smart option.
Arbitrage funds are also being used as an alternative to liquid funds. In June 2025 alone, investors put in more than ₹15,500 crore into these funds — a record high.
This shows that more people are choosing arbitrage funds for safer returns. As of now, around ₹2.5 lakh crore is being managed in these funds.
With the stock market being unpredictable, investors are making wise choices by opting for arbitrage funds to earn good returns with less risk.
How Arbitrage Funds Work
Arbitrage is a strategy where a stock is bought at a lower price in one market and sold at a higher price in another — at the same time. The small profit made from this price difference is called arbitrage profit.
For example, if a stock is available for ₹100 in the cash market and ₹102 in the futures market, the fund manager will buy it from the cash market and sell it in the futures market. This results in a profit of ₹2 per share — and this happens with almost no risk.
Arbitrage funds work by identifying such price differences between the cash and futures markets and making quick buy-sell trades. The profit from these trades is passed on to investors.
Fund managers need to have strong technical skills and quick decision-making ability to make the most out of these opportunities.
Risk, Returns, and Tax Benefits
Compared to regular stock market investments, arbitrage funds carry much lower risk. This is because the buying and selling happen at the same time.
So, whether the market goes up or down, the returns are based on the price gap — not market direction. That’s why they are considered a low-risk investment.
Although they don’t offer very high returns, arbitrage funds have given an average return of about 8% over the past year — which is better than what many banks are offering on FDs.
One of the key benefits is liquidity — you can withdraw your money whenever you need it. Additionally, these funds offer tax advantages.
If you invest for less than a year, you’ll pay 20% tax. But if you stay invested for more than a year, the tax rate drops to just 12.5%.
In comparison, the interest from FDs or liquid funds is taxed as per your income slab, which can be costly for people in higher tax brackets.
