Best Arbitrage Mutual Funds to Invest in India: Returns and Taxation
Arbitrage funds are hybrid mutual fund schemes that aim to make low-risk profits by buying and selling the same underlying assets in different markets. Arbitrageurs buy securities in a different market where the price is low and sell them simultaneously in a different market where the price is higher. Want to invest in these funds? Check out this list of the 10 best arbitrage funds, features, how to invest in them and taxation. Read on!
10 Best Arbitrage Funds in India in 2023
| Fund Name | Features |
| DSP Flexi Cap Fund – Direct Plan – Growth | Expense Ratio: 0.81% AUM: Rs.7909.88 Cr 3Y Return: 13.27% 5Y Return: 10.61% NAV: Rs.67.49 |
| Tata Arbitrage Fund – Direct Plan – Growth | Expense Ratio: 0.28% AUM: Rs.5629.86 Cr 3Y Return: 5.05% 5Y Return: NA NAV: Rs.12.51 |
| Invesco India Arbitrage Fund – Direct Plan – Growth | Expense Ratio: 0.38% AUM: Rs.2429.84 Cr 3Y Return: 5.00% 5Y Return: 5.61% NAV: Rs.28.57 |
| Edelweiss Arbitrage Fund – Direct Plan – Growth | Expense Ratio: 0.38% AUM: Rs.5078.84 Cr 3Y Return: 4.97% 5Y Return: 5.72% NAV: Rs.17.23 |
| Kotak Equity Arbitrage Fund – Direct Plan – Growth | Expense Ratio: 0.43% AUM: Rs.21565.89 Cr 3Y Return: 4.85% 5Y Return: 5.59% NAV: Rs.33.12 |
| Nippon India Arbitrage Fund – Direct Plan – Growth | Expense Ratio: 0.21% AUM: Rs.8840.77 Cr 3Y Return: 4.83% 5Y Return: 5.73% NAV: Rs.23.84 |
| Axis Arbitrage Fund – Direct Plan – Growth | Expense Ratio: 0.31% AUM: Rs.3337.0 Cr 3Y Return: 4.80% 5Y Return: 5.58% NAV: Rs.16.88 |
| HSBC Arbitrage Fund – Direct Plan – Growth | Expense Ratio: 0.35% AUM: Rs.2454.16 Cr 3Y Return: 4.74% 5Y Return: 5.49% NAV: Rs.16.93 |
| Aditya Birla Sun Life Arbitrage Fund – Direct Plan – Growth | Expense Ratio: 0.34% AUM: Rs.4352.95 Cr 3Y Return: 4.73% 5Y Return: 5.52% NAV: Rs.23.7192 |
| ICICI Prudential Equity – Arbitrage Fund – Direct Plan – Growth | Expense Ratio: 0.39% AUM: Rs.10785.0 Cr 3Y Return: 4.65% 5Y Return: 5.48% NAV: Rs.30.56 |
*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
10 Best Performing Arbitrage Funds – Detailed Overview
1. DSP Flexi Cap Fund – Direct Plan – Growth
The DSP Flexi Cap Fund – Direct Plan – Growth invests in select large, mid and small-cap companies. It is DSP’s oldest equity fund having a 24+ year track record. About 65%-100% assets are equity or equity-related securities and 0%-35% are debt and money market securities. This fund aims to generate long-term capital appreciation.
- AUM: Rs.7909.88 Cr
- 3Y Return: 13.27%
- 5Y Return: 10.61%
- Minimum Investment Amount: Rs.500 SIP or lumpsum
2. Tata Arbitrage Fund – Direct Plan – Growth
Tata Arbitrage Fund – Direct Plan has 70.08% investments in domestic equities across market cap. 2.18% investment is in debt instruments. This fund aims to generate returns by investing in arbitrage opportunities of equity markets and debt and money market instruments. This fund was launched in December 2018 and since then has provided 5.19% returns.
- AUM: Rs.5629.86 Cr
- 3Y Return: 5.05%
- 5Y Return: NA
- Minimum Investment Amount
- SIP: Rs.150
- Lumpsum: Rs.5000
3. Invesco India Arbitrage Fund – Direct Plan – Growth
Invesco India Arbitrage Fund – Direct Plan – Growth was launched in 2013 and has a track record of 10 years. This fund has 61.55% investments in domestic equities across large, mid and small-cap stocks. And, 4.1% investments in debt and Government securities. The investment objective is to generate income by investing in arbitrage opportunities.
- AUM: Rs.2429.84 Cr
- 3Y Return: 5.00%
- 5Y Return: 5.61%
- Minimum Investment Amount
- SIP: Rs.500
- Lumpsum: Rs.1000
4. Edelweiss Arbitrage Fund – Direct Plan – Growth
Launched in 2014, Edelweiss Arbitrage Fund – Direct Plan has a track record of 8+ years and a CAGR of 5.88%. It is a tax-efficient investment option. This fund invests in AAA-rated debt and money market instruments. 71.18% of investments are in domestic equities across the market capitalisation. 18.51% in debt, 17.53% in Government securities and 0.98% in low-risk securities.
- AUM: Rs.5078.84 Cr
- 3Y Return: 4.97%
- 5Y Return: 5.72%
- Minimum Investment Amount
- SIP: Rs.500
- Lumpsum: Rs.5000
5. Kotak Equity Arbitrage Fund – Direct Plan – Growth
Kotak Equity Arbitrage Fund – Direct Plan was launched in 2013 and the investment objective of this fund is to generate income and capital appreciation by investing in arbitrage opportunities. This fund has 73.91% investments in domestic equities across large, mid and small-cap stocks.
- AUM: Rs.21565.89 Cr
- 3Y Return: 4.91%
- 5Y Return: 5.62%
- Minimum Investment Amount
- SIP: Rs.500
- Lumpsum: Rs.5000
6. Nippon India Arbitrage Fund – Direct Plan – Growth
Nippon India Arbitrage Fund – Direct Plan has 70.1% investments in domestic equities across the market cap. 7.26% investments in debt, which includes Government securities and low-risk securities. The equity portion is primarily invested in financial, services, materials, technology and energy sectors. This fund was launched in 2010 and since then has grown to be a medium-sized fund in its category.
- AUM: Rs.8840.77 Cr
- 3Y Return: 4.83%
- 5Y Return: 5.73%
- Minimum Investment Amount
- SIP: Rs.100
- Lumpsum: Rs.5000
7. Axis Arbitrage Fund – Direct Plan – Growth
Axis Arbitrage Fund – Direct Plan has 71.59% investments in domestic equities across large, mid and small-cap stocks. 8.43% investments in debt, which include Government and low-risk securities. This fund’s equity portion is primarily invested in financial, materials, technology, energy and consumer staples sectors. This fund aims to generate income through arbitrage opportunities.
- AUM: Rs.3337.0 Cr
- 3Y Return: 4.80%
- 5Y Return: 5.58%
- Minimum Investment Amount
- SIP: Rs.100
- Lumpsum: Rs.5000
8. HSBC Arbitrage Fund – Direct Plan – Growth
HSBC Arbitrage Fund – Direct Plan was launched in 2014 and since then has grown to a medium-sized fund of its category. The fund has 69.8% investments in domestic equities across market caps and 22.95% investments in debt, which includes Government and low-risk securities.
- AUM: Rs.2454.16 Cr
- 3Y Return: 4.74%
- 5Y Return: 5.49%
- Minimum Investment Amount
- SIP: Rs.500
- Lumpsum: Rs.5000
9. Aditya Birla Sun Life Arbitrage Fund – Direct Plan – Growth
Aditya Birla Sun Life Arbitrage Fund – Direct Plan has 68.88% investments in domestic equities across large, mid and small-cap stocks. This arbitrage fund seeks to generate income by investing in equity and equity-related securities and taking advantage of price differences in various market segments. The fund invests majorly in equities of financials, services, materials and energy sectors. It was launched in 2013 and is a medium-sized fund of its category.
- AUM: Rs.4352.95 Cr
- 3Y Return: 4.68%
- 5Y Return: 5.50%
- Minimum Investment Amount
- SIP: Rs.1000
- Lumpsum: Rs.1000
10. ICICI Prudential Equity – Arbitrage Fund – Direct Plan – Growth
ICICI Prudential Equity – Arbitrage Fund – Direct Plan was launched in 2013 and this fund seeks to generate low-volatility income by investing in equity and equity-related securities and taking advantage of arbitrage. 66.23% investments are in domestic equities across market caps and 16.5% investments in debt, which includes Government and low-risk securities.
- AUM: Rs.10785.0 Cr
- 3Y Return: 4.65%
- 5Y Return: 5.48%
- Minimum Investment Amount
- SIP: Rs.1000
- Lumpsum: Rs.5000
How do Arbitrage Mutual Funds Work?
Arbitrage mutual funds work on the gap in the pricing of equity shares between the current and futures market leveraging higher returns. Here a fund manager consistently buys shares in the cash market to sell them in the derivatives market simultaneously.
Let us understand how these funds work with an example:
Assume, XYZ Company has equity shares which the company trades in the stock market for Rs.1,220 and in the derivatives market at Rs.1,235. Now the fund managers buy XYZ Company’s shares from the stock market and form a contract to sell it at Rs.1,235 in the future. Once the prices coincide at the end of the month the fund manager will sell the shares in the futures market and earn a risk-free profit.
However, if the fund manager notices that the prices are falling in the future then he or she can choose to enter in a long-term contract and choose to sell it once the prices coincide again.
Avenues Where Arbitrage Funds Invest Your Money
A fund manager buys shares from the stock market and simultaneously sells them in the futures market. Typically, these funds invest 65-100% in equity assets and 0-35% in debt asset classes.
Who Should Invest in Arbitrage Funds in India?
These funds are most beneficial for investors who are looking for short or medium-term financial gains. However, a fund manager will only invest your money when there are definite opportunities to earn returns.
If you want to invest in equities but do not want to bear the risks, these best funds are for you. It gives an investor a chance to park their surplus funds safely in a constantly fluctuating market.
Features of Best Arbitrage Mutual Funds
The features of some of the best arbitrage mutual funds are:
- Suitable for an investment period of 1-3 years
- Offers more tax-efficient returns compared to fixed deposits due to equity taxation
- The fund manager is already aware of the cost price and selling price so there is no stock market risk involved
- Investors can choose the investment route i.e. if they want to invest in lump sum or SIP.
Why Should You Invest in Arbitrage Funds?
1. Low-risk
The prime benefit of investing in these funds is that they involve low risk. As per historic data, these funds could perform well when the market fluctuates. Also, as the securities are being bought and sold simultaneously, there is no possible long-term risk involved as well.
2. Potential to Perform Reasonably Well in a Volatile Market
Unlike other low-risk securities, these funds could flourish in a highly volatile market. This is because fund managers can take advantage of significant fluctuations in individual stocks through buying/selling.
3. Taxed as Equity Funds
The portfolio of these funds in India consists of 65% equity funds; thus, they are taxed like equity funds. So, if you keep your shares in these funds for more than one year, the profit will be taxed at a capital gains rate, which is much lower than the income tax rate.
How to Choose the Best Arbitrage Mutual Funds?
Investors should look for the following essential elements while choosing the best funds:
- The performance of funds compared to other similar funds
- Percentage of debt and equity based on risk appetite
- Exit load rate and low expense ratio
- Stability in terms of returns
How to Invest in Best Arbitrage Mutual Funds?
Individuals can invest in arbitrage mutual funds via both online and offline modes. In the case of an offline method, the investors can visit an AMC or financial institution. There a fund manager will guide the individual through the entire process.
To invest in these funds online, investors can take the help of various financial institutions’ websites. There one needs to create an investment account. Then fill up the required details and submit all the KYC documents. After KYC verification, the investor can start investing in the selected fund by entering the SIP or lump sum amount.
Factors to Consider Before Investing in Best Arbitrage Mutual Funds
1. Financial Goal
It is important to go through a fund’s investment objective to ensure that these align with your financial goal. Arbitrage funds in India are a great option for those investors who have excess funds and want to make short to medium-term profits.
As these funds offer high profits when the market is volatile, it is considered better to invest a lump sum amount. When price differentials are favourable, you can also transfer your investment from equity funds to arbitrage funds in India.
2. Returns on Investment and Risks
These funds are known for having low risks because the fund manager buys a stock in a market and immediately sells them to another. But the chances of finding good price differentials are few; thus, the investments aren’t as impressive as other funds. These funds attract those investors who are looking to make average returns and take low risks.
3. Expense Ratio
Fund houses charge a certain amount every year from investors to manage their mutual funds. This expense ratio is a percentage of assets that the fund manager charges.
As a fund manager conducts multiple transactions every day for arbitrage funds, their fees can be quite high. Even the exit and entry load can be hefty for these funds. Thus, you should review these costs before investing.
Taxation on Arbitrage Funds
Although classified as a hybrid, Arbitrage Mutual Funds are treated as equity funds while taxation. Investors who hold such schemes for less than 12 months are taxed under 15% capital gains. However, if these investors sell these shares after a year they will only be taxed 10% of capital gains.
In the case of debt funds if an investor sells his or her funds before three years then the gains will be added to one’s income and taxed as per the income tax slab.
Risks of Investing in Arbitrage Funds
Arbitrage mutual funds are popular because they provide a low-risk environment to investors as fund managers are simultaneously buying and selling shares. However, risk arises when the markets are trading flat and opportunities tend to become scarce. In these cases, these funds generate lower or below-average returns.
Another risk involved in arbitrage mutual fund investments is credit risk. Since arbitrage mutual funds are hybrid funds they invest a small number of assets in debts. These investments are made in the form of term deposits or very short-term debt. This results in incurring interest rate risks and credit risks.
Final Word
The low-risk profits offered by the best arbitrage funds in India have been appealing to investors. These funds provide reasonable gains even when the market is volatile. For investors looking to park their money for a short-term and generate returns that beat the market volatility, these funds could be a great investment option.
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*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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FAQs
Ans: Arbitrage funds are known for having low risks, but they are not risk-free. They do not have risks that are part of long-term investments, but there is no guarantee that your profits will always increase.
Ans: When it comes to taxing, arbitrage funds are treated as equity funds. If you hold on to your investment in the fund for less than 12 months, you will be taxed 15% capital gain tax. But for more than a year of holding, you will pay 10% capital gain tax.
Ans: The chances of this happening are less, but it is not impossible. These funds are known for giving short-term profits, but in a longer time period, they can give negative returns. These negative returns will only be there for a short span.
Ans: The risk profile of arbitrage funds is similar to that of debt funds. Short-term debt funds like liquid funds are usually considered to be safer as they are not dependent on market volatility.
Ans: Ideally short to medium term investments with an ideal investment period of 3-5 years.
Ans: The ideal investment amount depends on the investor’s goals, requirements and returns expectations. Individuals can start investing from as low as Rs 1,000.
Ans: For investors looking for short to medium-term financial gains, investing in arbitrage funds could be good. They are relatively low risk. Not only does it have the potential to generate reasonably better returns but also benefit from equity taxation.
Ans: No, arbitrage funds do not have a lock-in period. However, to maximise returns, you must consider investing in arbitrage funds for at least 6 months and for tax efficiency, invest for 12 months or more.
Ans: Bank FDs are low-risk and secure investments with guaranteed returns. However, with arbitrage funds, the returns depend on the market conditions. While there is a potential for reasonably better returns, arbitrage funds invest in equity markets, which makes them riskier than FDs. However, if you have a short-term investment goal and a high-risk appetite, you may consider investing in arbitrage funds.
Ans: Arbitrage funds invest in equity and equity-related instruments and a minor portion in debt securities. These funds seek to generate income by buying and selling the same underlying assets in different capital markets to gain low-risk profits.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
