Arbitrage funds are considered the smart choice for investors to park money for short periods of time due to the tax advantage these regimes offer over debt regimes. Arbitration funds are taxed like action plans. They are eligible for long-term capital gains tax of 10% if investments are held for more than one year. If the investments are made for less than one year, a short-term capital gains tax of 15% will be applicable.

These plans were the natural choice of wealthy investors. However, arbitrage funds have lost some of their luster lately due to falling yields. If you still invest in arbitrage funds or are considering investing in them, this article may be of interest to you.

Arbitrage funds look for arbitrage opportunities available in the market. They look for the price difference that they can exploit between the cash and derivatives markets. They may also invest in debt securities and equities if no arbitrage opportunity is available in the market.

The returns of arbitrage funds have nothing to do with the interest rate regime as they are always looking for arbitrage opportunities. They may therefore be suitable for investors who do not wish to call on interest rates. Or they can be a good investment option in the current scenario where interest rates are likely to rise over the next few months.

However, you should keep in mind that there may be times when there are not a lot of arbitrage opportunities available in the market. This can happen when the market is heading in only one direction. A volatile market is useful for arbitrage funds as there will be more arbitrage opportunities available.

Here are our recommended arbitrage programs that you can consider investing in in the New Year:

Methodology used the following parameters to prequalify hybrid mutual fund systems.

Average sliding returns: Rolled daily for three years.

Consistency over the past three years: Hurst Exponent, H is used to calculate the consistency of a fund. The exponent H is a measure of the randomness of a fund’s NAV series. Funds with a high H tend to exhibit low volatility compared to funds with a low H.

i) When H is equal to 0.5, the return series is called a geometric Brownian time series. This type of time series is difficult to predict.

ii) When H is less than 0.5, the series is said to have mean return.

iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger the trend of the series

The downside risk: We have only considered the negative returns given by the UCITS for this measure.

X = returns below zero

Y = Sum of all squares of X

Z = Y / number of days taken to calculate the ratio

Downside risk = Square root of Z


i) Share of equity: It is measured by Jensen’s Alpha for the last three years. Jensen’s Alpha shows the risk-adjusted return generated by a mutual fund relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). A higher Alpha indicates that the performance of the portfolio has exceeded the returns predicted by the market.

Average returns generated by the MF Scheme =

[Risk Free Rate + Beta of the MF Scheme * {(Average return of the index – Risk Free Rate}

ii) Debt portion: Fund return – Benchmark return. The rolling daily rolling returns are used to calculate the performance of the fund and the benchmark index, then the active performance of the fund.

Asset size: For hybrid funds, the threshold asset size is Rs 50 crore

(Disclaimer: Past performance is no guarantee of future performance.)