Arbitrage Mutual Funds – Here Is All Corporate Investors Need To Know.

Planning to invest your idle business cash in mutual funds, but wondering which investment option can bring you stable returns with tax efficiency and less volatility? This blog might help!

Equity markets are often affected by market volatility. You undoubtedly enter the market with eyes wide open, knowing about the associated risks. But, regardless, it still gives you a kick in the guts when you watch your hard-earned business cash getting washed away overnight due to market fall, doesn’t it?

Equity markets being volatile corporate investors often go for debt investments. However, presently, long-term debt funds are bearing the brunt of RBI’s rate hikes. Additionally, debt instruments do not offer the same tax efficiency as equity.

Now the question arises – what should corporate investors choose when equities are volatile and long-term securities are again no-no due to the steep rise in interest rates by RBI?

Consider investing money from a business account in Arbitrage Funds. Arbitrage Funds are less volatile (as compared to equity funds and medium or long debt funds) and historically generate better post-tax returns (when compared to liquid funds). Want to learn more about Arbitrage Funds? Let’s explore –

What Are Arbitrage Funds?

As defined by Economic Times, “Arbitrage fund is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the volatility of the asset. These funds are hybrid as they have the provision of investing a portion of the portfolio in debt markets.”

In simple terms, Arbitrage funds are equity-oriented hybrid funds that take advantage of the arbitrage opportunities in the market. Now by arbitrage opportunities, we mean finding a difference of the same security between two and more markets and capitalizing on it. For instance, as an investor, if you find the price of a stock to be different in the spot market and futures market, then you can buy the stocks from the spot market and sell them in the future market to earn a profit. However, business decision-makers mostly lack time to research and find the right arbitrage opportunity. This is where Arbitrage funds come into the picture.

This is essentially different from other forms of investment where you purchase an asset and wait for its value to increase before selling it. In an arbitrage fund, when the fund manager sees the price difference between a stock in two different markets, he buys the stock from one market and sells it to another market simultaneously to generate profit. Moreover, in the other scenario, if there are no such opportunities available, the fund manager invests the money in short-term money market instruments such as debt funds. 

How do Arbitrage Mutual Funds Work?

Here are two possible scenarios where arbitrage opportunities exist:

Scenario #1 – When there is a price difference between exchanges.

Let’s say that the stocks of XYZ company are selling at Rs. 500 per share on the National Stock Exchange and at Rs. 510 per share on the Bombay Stock Exchange.

The fund manager of arbitrage funds will buy shares from the National Stock Exchange and sell them on the Bombay Stock Exchange. This will allow making a profit of Rs. 10 per stock without any risk.

Scenario #2 – When there is a price difference between the cash and future markets.

Let’s say that the share of XYZ company trades at Rs. 500 in the cash market and Rs. 520 in the future market. Now suppose that the fund manager of arbitrage funds buys 100 shares from the cash market at Rs 50,000 and creates a future contract to sell them at the price of Rs. 52,000 (520*100) later. When he will sell the share in the future market, he will earn a profit of 2000 without any risk.

Why Invest In Arbitrage Funds?

Here are a few reasons why you should diversify your portfolio by investing in arbitrage funds –

Are Arbitrage Mutual Funds Right For Corporate Investors?

The risk profile of an arbitrage mutual fund is quite similar to that of a debt fund. There are various types of arbitrage funds that utilize the liquid fund index as a point of reference for their fund. This means that arbitrage funds are perfect for corporate investors who want to invest in equity but do not wish to lose their hard-earned business idle cash in market volatility.

What To Consider Before Investing In Mutual Funds?


Talking about the interest rate risks, arbitrage funds generally come with low risks to investors because the fund securities are purchased and sold simultaneously in different markets.

Coming to credit risks, arbitrage funds are hybrid funds that invest some of their assets in debt. However, these investments are mostly short-duration debt instruments. Therefore, the credit rate and interest risk are very minimal in arbitrage funds. 


When it comes to returns, arbitrage funds are excellent alternatives that help you earn reasonable profits. Historically, arbitrage funds return lies in the range of 7% to 8% for five to 10 years. So, if you are a corporate investor who is looking to earn decent returns through portfolio diversification which includes both debt and equity in a volatile market, then arbitrage funds are the right option for you. It is also important to note here that there are no guaranteed returns in arbitrage funds.

Investment Horizon-

Arbitrage funds are the go-to business money investment option for you if you can keep your money parked for the medium-term horizon. Instead of parking your cash in FD, or investing just in debt funds, you can diversify your investment by investing in arbitrage funds. This aids you in creating an emergency corpus for your business and generating good returns on it.

Tax On Gains-

Arbitrage funds are treated as equity funds on taxation. If you keep your money parked in arbitrage funds for less than a year, then you make short-term capital gains (STCG) which are taxed at the rate of 15%. While if you keep your money invested for more than a year, then gains will be considered long-term capital gains. LTCG over Rs. 1 lakh is taxed at the rate of 10%. This is considerably less than other investment instruments such as fixed deposits and debt funds.

How To Invest in an Arbitrage Fund?

Investing your business’s surplus cash in arbitrage funds is paperless and easy with Shootih. 

Here is your step-by-step guide to investing in arbitrage funds with Shootih, the best mutual fund investment platform for corporates.

Step 1 – Create an account with Shootih.

Step 2 – If your KYC is not done, get it done with us for free.

Here is how Shootih helps businesses in getting their KYC completed-

Step 3 – Complete the registration process to get fully onboarded

Step 4 – Once KYC and registration are completed, you can start your investment journey. To begin investing in mutual funds, choose the duration you want to invest for.

Step 5 – For instance, you can invest for 7 days to 1 month.

Find the list of the best available mutual fund schemes for your preferred duration.

Step 6 – View fund details, enter the amount that you want to invest, and simply click invest.

You are all set to generate returns from your idle cash and grow your business profits.

To see how Shootih works, book a free demo call with us.

Key Takeaways

  • Arbitrage funds can be a good choice for corporate investors who want to earn profit from a volatile market without taking too much risk.
  • Arbitrage funds virtually eliminate the transaction void of risks that are generally associated with long-term investments.
  • Historically, arbitrage funds return lies in the range of 7% to 8% for five to 10 years.
  • Arbitrage funds are the go-to business money investment option for you if you can keep your money parked for the medium-term horizon. 
  • Arbitrage funds are treated as equity funds on taxation.
  • Investing your business’s surplus cash in arbitrage funds is a matter of a few steps with Shootih. 

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