Arbitrage Fund: A Low-Risk Strategy for Market Volatility

When markets fluctuate, investors often look for ways to earn steady returns without taking on excessive risk. This is where Arbitrage Funds come into play. These funds use a unique strategy—buying stocks in the cash market and simultaneously selling them in the futures market to lock in a price difference. This approach helps generate returns with minimal exposure to market volatility.

Arbitrage funds are classified as equity-oriented for taxation purposes, even though their risk profile is closer to debt funds. They are ideal for conservative investors who want better returns than a savings account but don’t want to dive into high-risk equity investments.

Understanding the Lock-In Period

One of the most common questions about arbitrage funds is whether they have a lock-in period. Unlike tax-saving mutual funds (ELSS), arbitrage funds generally do not have a mandatory lock-in. However, experts recommend staying invested for at least three months to allow the fund manager to execute arbitrage opportunities effectively. Exiting too early might lead to lower returns or even losses due to transaction costs.

Returns and Taxation

Arbitrage funds typically deliver returns in the range of 4–6% annually, depending on market conditions. Since they are treated as equity funds for tax purposes, short-term capital gains (holding period less than one year) are taxed at 15%, while long-term gains (beyond one year) are taxed at 10% after an exemption limit.

Arbitrage funds are a smart choice for investors seeking low-risk returns during volatile markets. With no strict lock-in period and favorable tax treatment, they offer a safe alternative to traditional debt funds. While they won’t make you rich overnight, they can provide stability and peace of mind in uncertain times.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.