An arbitrage fund is a mutual fund that earns FD-like returns with very low risk, yet it is taxed like an equity fund. I have invested in one of the arbitrage fund for 27 months. So in this post, I share how it works, what the 2026 data says, and exactly what my money earned.
List of Topic Covered
How an Arbitrage Fund Works
So think of a mango trader. He buys mangoes at ₹100 today. At the same time, he agrees to sell them at ₹101 next month. Whatever happens to mango prices, his ₹1 profit is locked.
An arbitrage fund does the same with shares:
- It buys a share in the stock market
- At the same moment, it sells the same share in the futures market at a slightly higher price
- On expiry day both prices meet, so the gap becomes profit
- The market can go up or down; the profit stays the same
Arbitrage Fund vs FD: The Real Difference Is Tax
Returns are similar to an FD. However, the tax is very different.
- FD interest is taxed at your income slab
- An arbitrage fund is taxed like equity, because at least 65% sits in shares
- Gains on units held under 1 year are taxed at 20%
- Gains on units held over 1 year are taxed at 12.5%, and the first ₹1.25 lakh a year (shared across all your equity investments) is tax-free
For example, someone in the 30% slab keeps only about 4.4% from an FD paying 6.4%. In contrast, an arbitrage fund earning about 7% and held for over a year can keep close to 7%.
Arbitrage Fund Data for 2026 (Jan 26 till Sep 26)
According to AMFI, the category grew steadily from January to September 2026:
- Assets reached ₹2.98 lakh crore, up 7.6%
- Investor accounts (folios) grew 26%, from 7.62 lakh to 9.61 lakh
- Net new money was ₹12,982 crore
- Money flowed out only in March and September, both quarter-ends
Top 5 Arbitrage Funds by Size and Returns
By size (AUM on 31 Oct 2026 · age since launch):
| Fund Name | AUM as on 31 Oct 2026 (Crore) | Age of the fund (Years) |
| Kotak Arbitrage Fund | ₹75,274 | 21 |
| SBI Arbitrage Opportunities Fund | ₹39,792 | 20 |
| ICICI Prudential Equity Arbitrage Fund | ₹35,576 | 19 |
| Aditya Birla Sun Life Arbitrage Fund | ₹26,933 | 17 |
| Invesco India Arbitrage Fund | ₹26,917 | 19 |
By 3-year CAGR (direct plan · age):
| Fund Name | 3 Years CAGR | Age of the fund (Years) |
| Invesco India Arbitrage Fund | 7.4% | 21 |
| Kotak Arbitrage Fund | 7.4% | 21 |
| Edelweiss Arbitrage Fund | 7.3% | 12 |
| Aditya Birla Sun Life Arbitrage Fund | 7.3% | 17 |
| Tata Arbitrage Fund | 7.3% | 7 |
LIC MF Arbitrage Fund Review
This is the fund I hold. Here is how it compares (CAGR, direct plan):
- Fund size: ₹305 crore, launched in January 2019 (7 years old)
- 1-year return: 6.7% (ranked 11 of 34)
- 3-year return: 7.1% (ranked 20 of 26), against 7.4% for the leaders
- 5-year return: 6.6% (ranked 17 of 24)
In short, it does its job. However, it has trailed the leaders by about 0.3% a year over 3 years. On ₹10 lakh, that adds up to roughly ₹11,000 over 3 years.
My Real Arbitrage Fund Returns After 27 Months
Here is my live portfolio in LIC MF Arbitrage Fund (direct plan) :
- Amount invested: ₹27,000
- Current value: ₹29,119
- Gain: ₹2,119
- My yearly return (XIRR): 6.63%
So the fund delivered what it promised, because my return is close to its own 1-year figure. If I had picked the category leader, I would have earned around ₹250 more. That is small for me, but it matters for larger amounts.
CAGR vs XIRR: the fund returns in this post are CAGR, which is the yearly return on a one-time investment. My 6.63% is XIRR, which is the yearly return across all my instalments, counting when each one went in.
Fun Facts About Arbitrage Funds
- It is an equity fund that does not bet on equity
- The average account holds about ₹31 lakh, so big money parks here
- It is one of the calmest mutual fund categories
- Busier markets usually mean wider price gaps, and so better returns
Is an Arbitrage Fund Right for You?
It suits you if you:
- Want to park money for 3 months to 2 years
- Are in a high tax slab
- Want FD-like calm
Think twice if you:
- Need the money within a month, because an exit load applies
- Want long-term wealth growth
- Pay little or no income tax
FAQs on Arbitrage Fund
It is low risk, because every share bought is hedged. However, it is not guaranteed like an FD, and returns can vary.
For people in higher tax slabs, it often is after tax. For people in low or nil tax slabs, an FD may work just as well.
Kotak Arbitrage Fund, with about ₹75,274 crore as of October 2026. It is also one of the oldest, launched in 2005.
CAGR shows the yearly return on a single investment. XIRR shows the yearly return when you invest in instalments, such as an SIP.
Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. Past performance does not guarantee future returns. I share my own holding for education, not as a recommendation. Tax rules can change, so check your own case with a tax adviser.
Ready to grow your money beyond FD-like returns? Once your short-term cash is parked in an arbitrage fund, read our simple guide on Flexi Cap Funds