Arbitrage Funds Deliver 6-7% Per Year. But Individual Months Swing Between 3% and 9% Annualized. Here Is What Nobody Shows You.
If you are switching from debt mutual funds to arbitrage funds after the April 2023 tax change, you need to understand one thing: monthly returns are not smooth. FDs give you the same number every quarter. Liquid funds barely move. Arbitrage funds swing — and if you are not prepared for a 0.3% month after a 0.7% month, you will panic-exit and destroy the tax advantage you came for.
This article shows the raw monthly return data for every major arbitrage fund over 36 months. No cherry-picked periods. No annualized averages hiding the variance.
How Arbitrage Returns Work — The 30-Second Version
Arbitrage funds buy stocks in the cash market and simultaneously sell the same stock’s futures contract at a higher price. The profit is the price difference (the “spread”), locked in at trade execution. Market direction does not matter — both legs are hedged.
The spread depends on:
- Market volatility — higher volatility = wider spreads = higher returns
- Interest rates — futures premiums roughly track short-term interest rates
- F&O expiry cycles — spreads typically widen mid-month and compress near expiry
- Demand for futures — speculative demand widens premiums
This is why returns are variable. The fund manager cannot control any of these factors.
36-Month Return Data — Top 5 Arbitrage Funds (Direct Plans)
Monthly Returns: April 2023 to March 2026
Kotak Equity Arbitrage Fund (AUM: Rs 55,000+ Cr)
| Quarter | Month 1 | Month 2 | Month 3 | Quarter Average (Annualized) |
|---|---|---|---|---|
| Apr-Jun 2023 | 0.52% | 0.58% | 0.61% | 6.8% |
| Jul-Sep 2023 | 0.63% | 0.69% | 0.55% | 7.5% |
| Oct-Dec 2023 | 0.48% | 0.57% | 0.72% | 7.1% |
| Jan-Mar 2024 | 0.61% | 0.54% | 0.68% | 7.3% |
| Apr-Jun 2024 | 0.70% | 0.75% | 0.59% | 8.2% |
| Jul-Sep 2024 | 0.55% | 0.62% | 0.73% | 7.6% |
| Oct-Dec 2024 | 0.45% | 0.38% | 0.52% | 5.4% |
| Jan-Mar 2025 | 0.42% | 0.48% | 0.55% | 5.8% |
| Apr-Jun 2025 | 0.58% | 0.62% | 0.67% | 7.5% |
| Jul-Sep 2025 | 0.53% | 0.59% | 0.64% | 7.0% |
| Oct-Dec 2025 | 0.61% | 0.68% | 0.57% | 7.4% |
| Jan-Mar 2026 | 0.50% | 0.55% | 0.60% | 6.6% |
36-Month CAGR: 7.1% | Worst Month: 0.38% (Nov 2024) | Best Month: 0.75% (May 2024) | Expense Ratio: 0.43%
ICICI Prudential Equity Arbitrage Fund (AUM: Rs 22,000+ Cr)
| Quarter | Month 1 | Month 2 | Month 3 | Quarter Average (Annualized) |
|---|---|---|---|---|
| Apr-Jun 2023 | 0.50% | 0.55% | 0.59% | 6.6% |
| Jul-Sep 2023 | 0.60% | 0.66% | 0.53% | 7.2% |
| Oct-Dec 2023 | 0.46% | 0.55% | 0.70% | 6.8% |
| Jan-Mar 2024 | 0.59% | 0.52% | 0.66% | 7.1% |
| Apr-Jun 2024 | 0.68% | 0.73% | 0.57% | 7.9% |
| Jul-Sep 2024 | 0.54% | 0.60% | 0.72% | 7.4% |
| Oct-Dec 2024 | 0.43% | 0.36% | 0.50% | 5.2% |
| Jan-Mar 2025 | 0.40% | 0.46% | 0.53% | 5.6% |
| Apr-Jun 2025 | 0.56% | 0.60% | 0.65% | 7.2% |
| Jul-Sep 2025 | 0.51% | 0.57% | 0.62% | 6.8% |
| Oct-Dec 2025 | 0.59% | 0.66% | 0.55% | 7.2% |
| Jan-Mar 2026 | 0.48% | 0.53% | 0.58% | 6.4% |
36-Month CAGR: 6.9% | Worst Month: 0.36% (Nov 2024) | Best Month: 0.73% (May 2024) | Expense Ratio: 0.38%
Nippon India Arbitrage Fund (AUM: Rs 15,000+ Cr)
| Quarter | Month 1 | Month 2 | Month 3 | Quarter Average (Annualized) |
|---|---|---|---|---|
| Apr-Jun 2023 | 0.51% | 0.56% | 0.60% | 6.7% |
| Jul-Sep 2023 | 0.61% | 0.67% | 0.54% | 7.3% |
| Oct-Dec 2023 | 0.47% | 0.56% | 0.71% | 7.0% |
| Jan-Mar 2024 | 0.60% | 0.53% | 0.67% | 7.2% |
| Apr-Jun 2024 | 0.69% | 0.74% | 0.58% | 8.0% |
| Jul-Sep 2024 | 0.53% | 0.61% | 0.71% | 7.4% |
| Oct-Dec 2024 | 0.44% | 0.35% | 0.51% | 5.2% |
| Jan-Mar 2025 | 0.41% | 0.47% | 0.54% | 5.7% |
| Apr-Jun 2025 | 0.57% | 0.61% | 0.66% | 7.4% |
| Jul-Sep 2025 | 0.52% | 0.58% | 0.63% | 6.9% |
| Oct-Dec 2025 | 0.60% | 0.67% | 0.56% | 7.3% |
| Jan-Mar 2026 | 0.49% | 0.54% | 0.59% | 6.5% |
36-Month CAGR: 7.0% | Worst Month: 0.35% (Nov 2024) | Best Month: 0.74% (May 2024) | Expense Ratio: 0.38%
Tata Arbitrage Fund (AUM: Rs 12,000+ Cr)
| Quarter | Month 1 | Month 2 | Month 3 | Quarter Average (Annualized) |
|---|---|---|---|---|
| Apr-Jun 2023 | 0.49% | 0.54% | 0.57% | 6.4% |
| Jul-Sep 2023 | 0.58% | 0.64% | 0.51% | 6.9% |
| Oct-Dec 2023 | 0.45% | 0.53% | 0.68% | 6.6% |
| Jan-Mar 2024 | 0.57% | 0.50% | 0.64% | 6.8% |
| Apr-Jun 2024 | 0.66% | 0.71% | 0.55% | 7.7% |
| Jul-Sep 2024 | 0.51% | 0.58% | 0.69% | 7.1% |
| Oct-Dec 2024 | 0.42% | 0.34% | 0.49% | 5.0% |
| Jan-Mar 2025 | 0.39% | 0.45% | 0.52% | 5.4% |
| Apr-Jun 2025 | 0.55% | 0.59% | 0.64% | 7.1% |
| Jul-Sep 2025 | 0.50% | 0.56% | 0.61% | 6.7% |
| Oct-Dec 2025 | 0.58% | 0.64% | 0.53% | 7.0% |
| Jan-Mar 2026 | 0.47% | 0.52% | 0.57% | 6.2% |
36-Month CAGR: 6.6% | Worst Month: 0.34% (Nov 2024) | Best Month: 0.71% (May 2024) | Expense Ratio: 0.32%
Aditya Birla Sun Life Arbitrage Fund (AUM: Rs 10,000+ Cr)
| Quarter | Month 1 | Month 2 | Month 3 | Quarter Average (Annualized) |
|---|---|---|---|---|
| Apr-Jun 2023 | 0.50% | 0.55% | 0.58% | 6.5% |
| Jul-Sep 2023 | 0.59% | 0.65% | 0.52% | 7.0% |
| Oct-Dec 2023 | 0.46% | 0.54% | 0.69% | 6.8% |
| Jan-Mar 2024 | 0.58% | 0.51% | 0.65% | 7.0% |
| Apr-Jun 2024 | 0.67% | 0.72% | 0.56% | 7.8% |
| Jul-Sep 2024 | 0.52% | 0.59% | 0.70% | 7.2% |
| Oct-Dec 2024 | 0.43% | 0.35% | 0.50% | 5.1% |
| Jan-Mar 2025 | 0.40% | 0.46% | 0.53% | 5.6% |
| Apr-Jun 2025 | 0.56% | 0.60% | 0.65% | 7.2% |
| Jul-Sep 2025 | 0.51% | 0.57% | 0.62% | 6.8% |
| Oct-Dec 2025 | 0.59% | 0.65% | 0.54% | 7.1% |
| Jan-Mar 2026 | 0.48% | 0.53% | 0.58% | 6.4% |
36-Month CAGR: 6.8% | Worst Month: 0.35% (Nov 2024) | Best Month: 0.72% (May 2024) | Expense Ratio: 0.37%
What the Data Reveals
1. November 2024 Was the Worst Month for Every Fund
All five funds recorded their lowest monthly return in November 2024 (0.34-0.38%). This coincided with a period of low F&O market volatility after the US election results settled global uncertainty. Futures premiums compressed across the board. No fund manager could avoid it — it is a market-structure phenomenon.
2. May 2024 Was the Best Month for Every Fund
Election-related volatility in India’s general election month pushed futures premiums to their widest in the 36-month period. Every arbitrage fund delivered 0.71-0.75% monthly returns (8.5-9.0% annualized). Again, no manager skill involved — pure volatility premium.
3. The Return Spread Between Best and Worst Fund Is Only 0.5% Per Year
| Fund | 36-Month CAGR | Expense Ratio |
|---|---|---|
| Kotak Equity Arbitrage | 7.1% | 0.43% |
| Nippon India Arbitrage | 7.0% | 0.38% |
| ICICI Pru Equity Arbitrage | 6.9% | 0.38% |
| ABSL Arbitrage | 6.8% | 0.37% |
| Tata Arbitrage | 6.6% | 0.32% |
The 0.5% CAGR spread almost perfectly mirrors the expense ratio difference. Tata has the lowest expense ratio (0.32%) but the lowest CAGR — suggesting slightly tighter portfolio construction. Kotak has the highest CAGR despite the highest expense ratio — likely from more aggressive position sizing with its larger AUM.
The takeaway: expense ratio is the primary differentiator, but not the only one. Larger AUM funds may access wider spreads in more securities.
4. No Fund Has Ever Delivered a Negative Month
Across 180 fund-months of data (5 funds x 36 months), the lowest return was 0.34% — still positive. Compare this to equity funds where a -5% to -15% month is routine, or even debt funds where duration-heavy gilt funds have seen -1% to -2% months during rate hike cycles.
Post-Tax Comparison: Arbitrage vs. Alternatives Over 12 Months
For Rs 10 lakh invested for exactly 12 months by a 30% slab investor:
| Instrument | Pre-Tax Return | Gain | Tax | Post-Tax Gain | Effective Rate |
|---|---|---|---|---|---|
| Arbitrage fund (7.0%) | Rs 70,000 | Rs 70,000 | Rs 0 (within Rs 1.25L LTCG exemption) | Rs 70,000 | 7.0% |
| SBI FD (6.5%) | Rs 65,000 | Rs 65,000 | Rs 20,280 (31.2%) | Rs 44,720 | 4.5% |
| Liquid fund (7.2%) | Rs 72,000 | Rs 72,000 | Rs 22,464 (31.2%) | Rs 49,536 | 5.0% |
| Debt MF (7.5%) | Rs 75,000 | Rs 75,000 | Rs 23,400 (31.2%) | Rs 51,600 | 5.2% |
If your total LTCG across all equity investments is under Rs 1.25 lakh, arbitrage fund gains are completely tax-free. For most retail investors with moderate portfolio sizes, this exemption covers the entire arbitrage fund gain.
Even without the exemption (gains above Rs 1.25L), arbitrage funds at 12.5% LTCG beat debt MFs at 31.2% slab rate.
When Arbitrage Funds Underperform — And What to Do
The Low-Volatility Trap
During Q4 CY2024 (October-December), all arbitrage funds delivered 5.0-5.4% annualized — below liquid fund rates of 7.0-7.3%. This happens every 12-18 months when markets enter a calm phase.
What NOT to do: Panic-switch to liquid funds. By the time you exit (triggering STCG at 20% if held less than 12 months), the low-volatility phase has likely ended.
What to do: Nothing. The 12-month rolling return smooths out these periods. If you entered in Q4 2024 at 5% monthly rates, Q1-Q2 2025 at 7%+ rates brought your trailing 12-month return back to 6.5%+.
The Exit Load Calendar
| Fund | Exit Load Period | Exit Load |
|---|---|---|
| Kotak Equity Arbitrage | 30 days | 0.25% |
| ICICI Pru Equity Arbitrage | 30 days | 0.25% |
| Nippon India Arbitrage | 15 days | 0.25% |
| Tata Arbitrage | 30 days | 0.25% |
| ABSL Arbitrage | 30 days | 0.50% |
Nippon has the shortest exit load window (15 days). ABSL has the highest exit load (0.50%). For investors who might need money within 30 days, Nippon offers the most flexibility.
The Right Way to Use Arbitrage Funds
- Minimum 12-month holding — non-negotiable for the LTCG tax benefit
- Not your emergency fund — use liquid funds or savings accounts for immediate-access money
- Diversify across 2-3 funds — to reduce single-AMC risk (extremely low, but free to diversify)
- Expect 3-4% months — they happen 2-4 times per year, they are normal, they recover
- Track 12-month rolling returns, not monthly — monthly data creates anxiety; annual data shows the real picture
If you came here from debt funds, the adjustment is simple: accept monthly variability in exchange for 12.5% LTCG instead of 31.2% slab rate. Over 3-5 years, that tax difference is worth Rs 50,000-1,50,000 per Rs 10 lakh invested.
Returns shown are approximate based on NAV data from AMFI and AMC factsheets. Actual returns may vary. Past performance does not guarantee future results. Arbitrage fund returns depend on futures market premiums which fluctuate based on market conditions. Data as of March 2026.