When it comes to combining liquidity, low risk, and tax efficiency, arbitrage funds deserve a serious look. They are designed to capture market price gaps without taking directional equity risk—making them a popular short-term parking avenue that can deliver better post-tax outcomes than traditional fixed deposits (FDs) or debt funds.

What Is an Arbitrage Fund?

An arbitrage fund exploits price differences of the same security across markets or instruments. For instance, if a stock trades at ₹1,000 in the cash market while its futures contract is at ₹1,020, the fund can buy cash and simultaneously sell futures, locking in a ₹20 spread. Because both legs are placed together, the strategy aims for market-neutral, low-volatility returns.

Key Characteristics

• Equity classification: Maintains >65% equity (largely hedged), so it is taxed like equity.
• Low risk vs equity funds: Returns stem from spreads, not market direction.
• Liquidity: Generally T+2/T+3 redemptions; s