Tax-Smart Cash
Arbitrage Mutual Funds
Verified Indian financial mathematics, statutory regulations, and step-by-step actionable breakdowns.
Expected Yield6.8% - 7.5% p.a.
Lock-In TenureNone (Exit load within 15-30 days)
Risk LevelLow Risk
Tax StatusLTCG 12.5%
Overview & Statutory Background
Arbitrage mutual funds generate returns by simultaneously buying shares in the cash market and selling them at a premium in the futures market. Because they do not take directional market bets, risk is minimal like a debt fund, yet they qualify for lower equity capital gains taxation.
Key Features & Operational Guidelines
Exploits price mispricing between spot and futures equity markets
Minimum 65% exposure to equity and equity derivatives qualifies for equity taxation
Virtually zero equity market directional risk
High liquidity with T+2 redemption timelines
Significantly higher post-tax return than bank FDs for investors in 30% tax bracket
Who is Eligible to Invest?
- •All resident and NRI investors with surplus cash for 3 to 12 months
Indian Taxation Breakdown
| Stage | Tax Treatment |
|---|---|
| Initial Investment | No 80C deduction. |
| Interest & Returns | Compounded into NAV. |
| Maturity / Withdrawal | Taxed as Equity: STCG (<= 1 yr) at 20%; LTCG (> 1 yr) at 12.5% above ₹1.25L gain (far lower than 30% slab rate on FDs). |
Advantages & Limitations
Key Advantages (Pros)
- ✓Taxed as equity fund: massive tax savings for investors in 30% and 39% tax brackets
- ✓Zero credit risk and zero directional stock market downside
- ✓Ideal parking ground for business surplus or real estate advance funds
- ✓Outperforms post-tax fixed deposit returns during volatile market conditions
Important Limitations (Cons)
- ✕Arbitrage spreads can shrink during quiet or range-bound market periods
- ✕Nominal exit load if redeemed within 15 to 30 days
- ✕Not meant for long-term multi-year compounding
Arbitrage Mutual Funds FAQs
A 7.0% bank FD yields only 4.8% post-tax in the 30% slab. An Arbitrage fund generating 7.0% held for over 1 year is taxed at just 12.5% (or 0% within ₹1.25L exemption), delivering a 6.2% - 7.0% net post-tax return.
Calculate Compound Returns
Use our interactive calculators to simulate exact growth schedules for this asset.