Arbitrage Funds in Mutual Funds: Meaning, Features and Suitability

As per SEBI Regulations, an arbitrage fund is an open-ended hybrid mutual fund scheme investing at least 65% of its total assets in equity and equity-related instruments. The fund is permitted to invest in “arbitrage opportunities”. Investment in InvITs is not permitted 

Furthermore, the asset allocation for “defensive considerations” shall be disclosed in the Scheme Information Document (SID). Exposure to debt instruments shall be restricted to Government securities with a maturity of less than one year and repos in Government securities.

Investing can often feel like navigating a complex maze, especially when it comes to balancing risk and returns. Arbitrage fund can be an appealing choice for those looking for low-risk investment options. These funds aim to take advantage of price differences in various markets, allowing investors to earn returns with relatively low risk. In this blog, we will delve into the concept of arbitrage funds and highlight Tata Arbitrage Fund, one of the available options for those looking to invest in this category.

Arbitrage funds are mutual funds that aim to profit from price discrepancies between the cash and derivatives markets. By simultaneously buying and selling securities, these funds can lock in profits while minimizing risk. This strategy is particularly effective in volatile markets, where price differences are more common.

1. Investment Strategy: Fund managers identify opportunities where the price of a security in the cash market differs from its price in the futures market. They buy the security in the cheaper market and sell it in the more expensive market, securing a profit.
2. Asset Allocation: Typically, arbitrage funds invest primarily in equities and equity derivatives, while also maintaining a portion of their portfolio in debt and money market instruments for liquidity.
3. Risk Management: By focusing on arbitrage opportunities, these funds aim to provide stable returns with lower risk compared to traditional equity funds.

The Tata Arbitrage Fund is an open-ended scheme investing in arbitrage opportunities. The investment objective of the scheme is to seek to generate reasonable returns by investing predominantly in arbitrage opportunities in the cash and derivatives segments of the equity markets and by investing balance in debt and money market instruments. There is no assurance that the objective of the scheme will be realised and the scheme does not assure or guarantee any returns.

Disclaimer: It may be noted that the risk-o-meter specified above is based on an internal assessment. The same shall be updated as per provision no. 6.16.1.j of SEBI Master Circular on Mutual Fund dated 20.03.2026, on Product labelling in mutual fund schemes on an ongoing basis.

Here are some reasons to consider this fund:

1. Professional Management

The fund is managed by experienced professionals who actively seek out arbitrage opportunities, ensuring that the fund capitalizes on the best available strategies.

2. Diversification

With investments spread across equities, derivatives, and debt instruments, the Tata Arbitrage Fund provides a well-rounded portfolio that can help mitigating risks associated with market fluctuations.

3. Liquidity

As an open-ended scheme, the Tata Arbitrage Fund allows investors to buy and sell units at the prevailing Net Asset Value (NAV) on any business day, ensuring easy access to funds.

4. Tax Efficiency

The fund benefits from equity taxation advantages, making it a tax-efficient choice for investors looking to optimize their returns.

Arbitrage funds, including the Tata Arbitrage Fund, are suitable for:

• Conservative Investors: Those seeking low-risk investment options with stable returns.
• Short-Term Investors: Ideal for individuals with a short- to medium-term investment horizon.
• Tax-Conscious Investors: Those looking for tax-efficient investment strategies.

Investing in the Tata Arbitrage Fund is simple. Here is how you can get started:

1. Go to the Tata Mutual Fund website, then navigate to the mutual fund login page
2. You can also visit the Tata Arbitrage Fund page and click ‘Start Investing’
3. Alternatively, you can invest through any investment portal, distributor, or offline at Tata Mutual Fund’s branch offices.

Arbitrage funds offer a unique opportunity for investors looking for relatively low-risk, tax-efficient investment options while aiming to provide relatively stable returns. The Tata Arbitrage Fund potentially exemplifies this strategy, providing professional management, diversification, and liquidity.

For more information, you can visit www.tatamutualfund.com. The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com.

1. What is an arbitrage mutual fund?

An arbitrage fund is a hybrid scheme permitted to invest in arbitrage opportunities. As per SEBI guidelines, it invests at least 65% of its total assets in equity and equity-related instruments. 

For defensive considerations, the asset allocation must be stated in the SID. Also, the “debt exposure” is limited to Government securities with a maturity below one year and repo of Government bonds. Investment in InvITs is not permitted. (Source: SEBI Circular - Rationalisation and Categorisation of Mutual Fund Schemes, dated February 26, 2026)

2. Is it good to invest in arbitrage funds?

Arbitrage funds may potentially suit conservative investors looking for relatively “lower-volatility” exposure to equity markets, particularly for short- to medium-term money. 

However, potential returns depend on the availability of arbitrage opportunities and market conditions. Thus, suitability should be assessed against the investor’s investment objectives and risk profile.

3. How does an arbitrage ETF differ from an arbitrage mutual fund?

An arbitrage mutual fund “actively” identifies potential price differences between the cash and derivatives markets and takes offsetting positions to capture the spread. It is classified by SEBI as a Hybrid Fund.

In contrast, an arbitrage ETF is a “passive” scheme that replicate or track a specified index (such as the Nifty 50 Arbitrage Index) and is traded on a stock exchange like a security. An arbitrage ETF is grouped under “Other Schemes” as per SEBI Categorisation. (not hybrid).

The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.