They are an alternative to short-term debt funds offering better tax efficiency
Arbitrage mutual funds, which are considered an alternative to short-term investment options such as liquid and ultra-short-duration funds, have been attracting investors’ attention of late.

Data compiled from the Association of Mutual Funds in India show that assets under management (AUM) of arbitrage funds have surged about 22 per cent to ₹63,310 crore as on July 26, from ₹52,062 crore on March 31, 2019.

The surge may be attributed to the recent instances of credit downgrades and defaults impacting the sentiment towards some debt mutual funds, including liquid funds.

Arbitrage MFs try to capitalise on the price differential of the same asset (stock or index) between two markets such as cash and futures markets. The risk in these funds is therefore relatively lower, similar to liquid funds.