Arbitrage Mutual Funds

An arbitrage fund buys a share and, in the same instant, sells a futures contract on it. The fund earns the small gap between the two prices.

A mutual fund is a pool of money from many people, invested by a professional manager under SEBI rules. An arbitrage fund must follow an arbitrage strategy and keep at least 65% of total assets in equity, meaning shares of companies. Arbitrage is buying in one market and selling in another to profit from a price difference.

The cash market is where shares change hands outright. A futures contract is a deal to buy or sell a share at a set price on a set future date. SEBI's investor website says the two prices often differ, and trading both "can yield some profits, though mostly these are small profits."

On expiry, the future is settled at the share's price on its last trading day, so the two prices meet. What the fund keeps is the gap it locked in when it opened the pair, less costs. When the contract ends, it opens a new pair to stay invested.

This pair is a hedge, a position that reduces possible losses on a holding. SEBI allows it as long as the future covers no more shares than the fund owns.

Futures need a deposit, called margin, set by the exchange's clearing house. Gains and losses on them are settled in cash every day. So the fund keeps some money in debt: loans to governments, banks or companies, as bonds and similar paper. SEBI allows only:

• certificates of deposit, short IOUs from banks;
• government securities with up to 1 year to run;
• units of liquid, money market or other funds with a Macaulay duration under 1 year (roughly, how long their loans take to repay).

Infrastructure investment trusts (InvITs) are not allowed. There is no lock-in, a spell when you cannot sell.

A thin price gap and the cost of each trade. When the gap is small, there is little to earn. One fund's scheme document warns that the fund may then earn no more than a liquid fund. It adds that frequent trading costs money, and not every share can be traded quickly.

One cost went up by law in 2026. Securities transaction tax (STT) is a tax on buying and selling securities such as shares and futures. On the sale of a futures contract, it rose from 0.02% to 0.05% of the traded price. The new rate covers trades entered into on or after 1 April 2026.

Every pair includes a futures sale. When the fund sells futures worth ₹2,64,000, it now pays ₹132 in STT, up from ₹52.80.

The mix can also shift. When arbitrage pays too little, the scheme document lets the fund move more into short-term debt for a short period. Each scheme document sets this defensive allocation, and SEBI gives no day count for "short term".

Because SEBI's formula leaves the hedged shares out of the score. The riskometer is the risk label SEBI makes every fund show, on six levels from Low to Very High.

SEBI's riskometer leaves out each hedged pair, a share bought and its futures sold. What is left is mostly short-term debt and cash. That is why almost every listed arbitrage fund read Low on 29 September 2026. If a fund sells futures on more shares than it owns, the extra is counted.

The hedged pair is left out of the riskometer, and Koshex reads that as little market risk on those trades. Little is not none. Derivatives are contracts, like futures, whose value comes from another asset. One fund's scheme document lists risks in its derivatives, such as mispricing.

The label is worked out again every month. If it changes, unitholders must be told by email or SMS.

Koshex is a distributor, a registered intermediary that helps you buy and manage funds. As yours, it reviews your holdings over time and flags a change like this.

They follow different SEBI rules, and the differences show up in access, pricing and tax. A liquid fund is a debt fund holding only paper that matures within 91 days. An exit load here means a charge for selling within a set period of buying. Your slab rate is the income-tax rate on your ordinary income.

An arbitrage fund may hold liquid fund units, but it is not a liquid fund. There is no same-day instant access, and the money reaches you within 3 working days of redemption.

The NAV is the price of one unit. An arbitrage fund prices its units on business days only, like an equity fund. A liquid fund prices them every calendar day, weekends included.

Which costs less in tax depends on your slab and on how long you hold. The liquid funds page sets out that category's rules.

If the fund meets the equity test, a gain is taxed at 20% within 12 months, and at 12.5% on gains above ₹1,25,000 after that.

Under section 198(8) of the Income-tax Act, 2025, the fund needs at least 65% in shares of Indian listed companies. It is measured on the year's average of monthly figures. Hedged shares count, because the Act has no hedging exclusion.

Your holding period runs from the day you buy a unit to the day you sell it.

• Short-term capital gain: profit on units held 12 months or less. Taxed at 20% if the fund meets the test.
• Long-term capital gain: profit on units held longer. Taxed at 12.5% if the fund meets the test, only on the tax year's equity long-term gains above ₹1,25,000. That ₹1,25,000 is counted once across all your equity-oriented funds.

Suppose you sell units for an assumed gain of ₹2,64,000. It is an illustration, not a forecast. We assume the fund met the 65% test and you had no other equity long-term gain that year. We also assume no surcharge, the extra charge on tax once income passes ₹50 lakh. Cess is an extra 4% on the tax.

A 30% slab means income above ₹24,00,000 under the default regime, or above ₹10,00,000 under the old one.

Which costs less depends on your slab and on how long you hold. Sold within a year, the arbitrage gain here costs the same as a liquid fund gain in a 20% slab. In a lower slab, it costs more. Held past a year, it costs less here than the liquid gain at a 20% or 30% slab, but not at 5%. That holds only while the fund keeps 65% in Indian listed shares on the year's average. One fund's scheme document warns that a long low-equity spell could make the fund "debt oriented" for tax that year.

When you redeem, a very small securities transaction tax is deducted, as for any equity fund. A resident pays no TDS (tax deducted at source) on redemption gains. The fund's own trades create no tax for you.

IDCW means payouts from the fund's income or gains, which cut the NAV by the amount paid out. You pay tax on them at your slab rate. Once your IDCW from a fund house crosses ₹10,000 in a tax year, it deducts 10% TDS on the whole amount. The TDS is then credited against your tax for the year.

Koshex suggests 3 months to 1 year or more, and there is no lock-in. The 12-month line matters most. After it, a gain moves from 20% to 12.5% above ₹1,25,000, if the fund meets the 65% test.

SEBI does not set an exit load for this category. Many funds charge a small one if you leave early, from a week to a year; check the scheme document. The scheme document is the fund's official rulebook.

Take money for a car you plan to buy in about ten months. Any gain would be short-term, taxed at 20% if the fund meets the test. Ten months may also fall inside a scheme's exit load period.

Koshex helps you choose a fund that suits your goal and timeline. Later, it reviews your holdings and flags changes.

Start with the 3-year return, then the riskometer and each scheme's exit load. There are 35 listed arbitrage funds, with ₹3,32,832 Cr in combined assets. AUM (assets under management) is the current total value of the money a fund manages. Of these, 24 have a 3-year record, and they are ranked on 3-year return and counted in the averages.

• 3-year CAGR. CAGR is the average yearly growth rate over a period, as if the fund had grown at the same pace every year. Set each fund's figure beside 6.2%, the simple average over funds with a 3-year record. The 1-year and 5-year averages are 5.8% and 6.3%.
• Riskometer. Check the level shown for each scheme.
• Expense ratio. The fund's yearly fee, shown as a percentage of your money and taken out of the fund's value. Each fund's factsheet shows it; compare funds on that figure.
• Exit load. Look up the period and the rate in the scheme document.

Every figure here describes the past, not the year ahead.

A SIP invests a fixed amount at regular intervals, usually monthly. A lumpsum is a larger amount invested at one time. Each SIP instalment buys units at that day's NAV and starts its own 12-month clock for tax.