{"id":13912,"date":"2026-05-27T07:32:40","date_gmt":"2026-05-27T07:32:40","guid":{"rendered":"https:\/\/lemonn.co.in\/blog\/glossary\/arbitrage-funds\/"},"modified":"2026-05-27T07:32:40","modified_gmt":"2026-05-27T07:32:40","slug":"arbitrage-funds","status":"publish","type":"glossary","link":"https:\/\/lemonn.co.in\/blog\/glossary\/arbitrage-funds\/","title":{"rendered":"Arbitrage Funds: Low-Risk Equity-Linked Returns"},"content":{"rendered":"<h1 id=\"arbitrage-funds-a-practical-guide-for-investors\"><a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/arbitrage\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">Arbitrage<\/a> Funds: A Practical Guide for Investors<\/h1>\n<p>Arbitrage Funds are <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/mutual-fund\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">mutual fund<\/a>s that profit from price differences between the cash and futures markets. They take offsetting positions to lock in small risk-free returns. Indian investors use arbitrage funds for short-term parking with <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/equity\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">equity<\/a>-like <a class=\"glossaryLink\"  href=\"https:\/\/lemonn.co.in\/blog\/glossary\/tax\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'  tabindex='0' role='link'>tax<\/a> benefits.<\/p>\n<p>This guide explains how Arbitrage Funds work and how to use them.<\/p>\n<h2 id=\"what-are-arbitrage-funds\">What Are Arbitrage Funds?<\/h2>\n<p>Arbitrage Funds use the price gap between:<\/p>\n<ul>\n<li>The cash market price of a stock<\/li>\n<li>The futures market price of the same stock<\/li>\n<\/ul>\n<p>By buying in one market and selling in the other, the fund locks in a small profit when prices converge.<\/p>\n<h2 id=\"how-they-work\">How They Work<\/h2>\n<p>When you invest:<\/p>\n<ul>\n<li>The AMC pools money from many investors<\/li>\n<li>The fund manager identifies arbitrage opportunities<\/li>\n<li>Equal positions are taken in cash and futures<\/li>\n<li>Returns come from the converging price gap<\/li>\n<\/ul>\n<p>The strategy is low risk and largely market neutral.<\/p>\n<h2 id=\"why-arbitrage-funds-matter\">Why Arbitrage Funds Matter<\/h2>\n<p>Arbitrage funds matter for three reasons:<\/p>\n<ol>\n<li>They offer low-risk returns<\/li>\n<li>They use equity tax rules<\/li>\n<li>They suit short-term parking<\/li>\n<\/ol>\n<p>A clean arbitrage fund supports tax-efficient cash management.<\/p>\n<h2 id=\"benefits\">Benefits<\/h2>\n<p>These funds offer:<\/p>\n<ol>\n<li>Low market risk<\/li>\n<li>Equity-like tax treatment<\/li>\n<li>Better post-tax returns than liquid funds for some investors<\/li>\n<li>Easy access to money<\/li>\n<\/ol>\n<p>They suit short-term parking with tax efficiency.<\/p>\n<h2 id=\"risks\">Risks<\/h2>\n<p>Risks include:<\/p>\n<ul>\n<li>Limited arbitrage opportunities in calm markets<\/li>\n<li>Small price gap may not cover costs<\/li>\n<li>Returns are not fixed<\/li>\n<li>Tax impact<\/li>\n<\/ul>\n<p>A clear plan helps manage these.<\/p>\n<h2 id=\"how-to-invest\">How to Invest<\/h2>\n<p>A common method:<\/p>\n<ol>\n<li>Identify money for 3 to 12 months<\/li>\n<li>Pick a quality arbitrage fund<\/li>\n<li>Choose direct or regular plan<\/li>\n<li>Invest lumpsum or <a class=\"glossaryLink\"  href=\"https:\/\/lemonn.co.in\/blog\/glossary\/sip\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'  tabindex='0' role='link'>SIP<\/a><\/li>\n<li>Track returns<\/li>\n<\/ol>\n<h2 id=\"arbitrage-funds-in-indian-markets\">Arbitrage Funds in Indian Markets<\/h2>\n<p>These funds use:<\/p>\n<ul>\n<li>F&amp;O <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/stocks\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">stocks<\/a> for arbitrage trades<\/li>\n<li><a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/index-futures\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">Index futures<\/a><\/li>\n<li>Sometimes corporate actions<\/li>\n<\/ul>\n<p>The strategy works in active markets.<\/p>\n<h2 id=\"tax-rules\">Tax Rules<\/h2>\n<p>Arbitrage funds use equity instruments above 65 percent gross, so they are taxed like equity funds:<\/p>\n<ul>\n<li>Short-term <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/capital-gain\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">capital gain<\/a>s (less than 1 year): 15 percent<\/li>\n<li>Long-term capital gains (more than 1 year): 10 percent above &#x20B9;1 lakh per year<\/li>\n<\/ul>\n<p>This tax structure is attractive for high-tax investors.<\/p>\n<h2 id=\"when-to-use-arbitrage-funds\">When to Use Arbitrage Funds<\/h2>\n<p>They suit:<\/p>\n<ul>\n<li>Short-term parking with tax benefit<\/li>\n<li>High-tax bracket investors<\/li>\n<li>Surplus cash for 3 to 12 months<\/li>\n<li>Alternative to liquid funds<\/li>\n<\/ul>\n<h2 id=\"common-mistakes\">Common Mistakes<\/h2>\n<p>New investors often:<\/p>\n<ul>\n<li>Expect high returns<\/li>\n<li>Use them for long-term goals<\/li>\n<li>Skip cost checks<\/li>\n<li>Confuse with equity funds<\/li>\n<\/ul>\n<p>A clean plan avoids these errors.<\/p>\n<h2 id=\"tips-for-better-use\">Tips for Better Use<\/h2>\n<p>A few habits help:<\/p>\n<ol>\n<li>Use for short-term parking<\/li>\n<li>Compare post-tax returns<\/li>\n<li>Choose direct plans<\/li>\n<li>Avoid frequent redemptions<\/li>\n<li>Track returns<\/li>\n<\/ol>\n<p>Sound habits build steady results.<\/p>\n<h2 id=\"arbitrage-funds-vs-liquid-funds\">Arbitrage Funds vs Liquid Funds<\/h2>\n<p>The two differ:<\/p>\n<ul>\n<li>Liquid funds: short-term debt, taxed as per slab<\/li>\n<li>Arbitrage funds: equity-linked, taxed as equity<\/li>\n<\/ul>\n<p>For high-tax investors, arbitrage funds may offer better post-tax returns.<\/p>\n<h2 id=\"arbitrage-funds-vs-equity-funds\">Arbitrage Funds vs Equity Funds<\/h2>\n<p>The two differ:<\/p>\n<ul>\n<li>Equity funds: directional bets on stocks<\/li>\n<li>Arbitrage funds: market-neutral cash-futures arbitrage<\/li>\n<\/ul>\n<p>Arbitrage funds carry much less market risk.<\/p>\n<h2 id=\"asset-allocation-role\">Asset Allocation Role<\/h2>\n<p>Arbitrage funds form part of the short-term parking allocation. They are often used as tax-efficient cash management tools.<\/p>\n<h2 id=\"returns-and-market-conditions\">Returns and Market Conditions<\/h2>\n<p>Arbitrage returns depend on the price gap between cash and futures. Returns are usually higher in active, volatile markets and lower in calm phases.<\/p>\n<h2 id=\"key-takeaways\">Key Takeaways<\/h2>\n<ul>\n<li>Arbitrage Funds profit from cash-futures price gaps<\/li>\n<li>They offer low-risk, market-neutral returns<\/li>\n<li>They are taxed like equity funds<\/li>\n<li>They suit short-term parking for high-tax investors<\/li>\n<li>Indian investors use them for tax-efficient cash management<\/li>\n<\/ul>\n<p>Arbitrage Funds offer a smart short-term parking option. Use them for tax efficiency, plan exits, and let the cash-futures gap work for steady returns.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Arbitrage Funds: A Practical Guide for Investors Arbitrage Funds are mutual funds that profit from price differences between the cash and futures markets. They take offsetting positions to lock in small risk-free returns. Indian investors use arbitrage funds for short-term parking with equity-like tax benefits. This guide explains how Arbitrage Funds work and how to [&#x2026;]<\/p>\n","protected":false},"author":3,"featured_media":0,"menu_order":0,"template":"","meta":{"_uag_custom_page_level_css":"","footnotes":""},"class_list":["post-13912","glossary","type-glossary","status-publish","hentry"],"blocksy_meta":[],"uagb_featured_image_src":{"full":false,"thumbnail":false,"medium":false,"medium_large":false,"large":false,"1536x1536":false,"2048x2048":false,"web-stories-poster-portrait":false,"web-stories-publisher-logo":false,"web-stories-thumbnail":false},"uagb_author_info":{"display_name":"Team Lemonn","author_link":"https:\/\/lemonn.co.in\/blog\/author\/ashu\/"},"uagb_comment_info":0,"uagb_excerpt":"Arbitrage Funds: A Practical Guide for Investors Arbitrage Funds are mutual funds that profit from price differences between the cash and futures markets. They take offsetting positions to lock in small risk-free returns. Indian investors use arbitrage funds for short-term parking with equity-like tax benefits. This guide explains how Arbitrage Funds work and how to&hellip;","_links":{"self":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/13912","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary"}],"about":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/types\/glossary"}],"author":[{"embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/users\/3"}],"version-history":[{"count":0,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/13912\/revisions"}],"wp:attachment":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/media?parent=13912"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}