Low-risk, tax-efficient: Enter with at least six-month horizon

Arbitrage funds received net inflows of ₹15,702 crore in May 2025, taking their assets under management (AUM) to ₹2,33,963 crore.

- HIMALI PATEL

This is far higher than their AUM of ₹69,311 crore in May 2020 and attests to their growing popularity.

How they work These hybrid funds generate returns by simultaneously buying equities and selling futures in the derivatives market.

"These funds try to capture the price differential between the two markets," says Harsha Upadhyaya, chief investment officer, Kotak Mahindra Asset Management Company.

Futures generally trade at a premium due to the cost of carry. A part of the portfolio of these funds is parked in high-quality fixed-income instruments for accrual income.

Performance in varied market conditions In bullish markets, arbitrage spreads widen. "The heightened demand for long futures positions leads to an increase in futures prices relative to spot prices. The widening spreads help arbitrage funds generate higher returns," says Bhavesh Jain, co-head - factor investing, Edelweiss Mutual Fund.