Arbitrage Fund
An equity-taxed fund that holds offsetting cash and futures positions, earning the basis rather than market returns.
How it is identified
Test: every cash market holding is fully hedged by a short futures position in the same security
Unit
qualitative
In depth
Because every long position is hedged, the fund has almost no directional market exposure and its return comes from the cost of carry, which tracks short-term interest rates. It qualifies as an equity fund for tax because it holds over 65% in equity, which historically made it a tax-efficient alternative to a debt fund for short horizons. Returns fall when the basis narrows, which happens in quiet markets, so it is not a fixed-return product. The residual risks are execution, roll cost and occasional periods when the spread is too thin to cover expenses.
Worked example
A fund buys shares at ₹500 and sells futures at ₹505 with a month to expiry. The ₹5 locked in is 1% for the month, about 12% annualised before costs — and it narrows toward zero as rates fall.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Arbitrage Fund” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.