“In the current environment, arbitrage funds are uniquely positioned to capture the potential benefits of market volatility while shielding investors from direct equity risks. Elevated roll spreads and sustained volatility have enabled arbitrage funds to deliver reasonable returns, even as traditional income avenues have become less attractive. For investors seeking equity tax returns, arbitrage funds offer a suitable proposition,” said Sailesh Jain, Fund Manager, Tata Asset Management.  

According to data from the Association of Mutual Funds in India (AMFI), arbitrage funds attracted Rs 43,077 crore between April and June 2025, surpassing inflows into other hybrid and equity categories. This surge underscores investor preference for instruments that can deliver relatively reasonable returns while minimising equity risk during periods of heightened uncertainty. However, profit is not guaranteed. 

Reflecting the broader industry trend, the Tata Arbitrage Fund too saw inflows of Rs 5,217 crore between April and June 2025, with Rs 356 crore coming from Pune. The fund had assets under management of Rs 14,274 crore as of June 30, 2025.

The environment is especially conducive for arbitrage strategies, as elevated volatility and strong roll spreads have opened potential return opportunities. The Reserve Bank of India’s recent easing measures—cutting the repo rate by 50 basis points and the Cash Reserve Ratio by 100 basis points—have further boosted the appeal of arbitrage funds over traditional fixed income avenues. The upcoming corporate earnings and a positive monsoon outlook are also expected to lift market sentiment.  

As global and domestic uncertainties continue to cloud the market outlook, arbitrage funds are a choice for investors to help them navigate choppy waters. With interest rates on a downward trend and savings account returns declining, traditional fixed-income options have become relatively less attractive in terms of returns. At the same time, factors such as the anticipated Indo-US trade deal, tariff negotiations, and ongoing geopolitical tensions are keeping the market volatility elevated. Although the US dollar index remains subdued for now, any spike in global risk aversion may trigger fresh market swings. In this backdrop, arbitrage funds seek to offer investors a low-risk way to capitalise on volatility without direct equity exposure. 

Arbitrage funds also offer tax efficiency, as they are taxed like equity mutual funds, giving them an edge over short-term debt instruments, particularly for high-income investors looking to optimise post-tax returns. For those seeking a low-risk hedge against equity market exposure, along with the potential for competitive returns vis-a-vis traditional savings options, arbitrage funds present a potential investment opportunity in today’s volatile environment. 

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MUMBAI: Franklin Templeton (India) announced the launch of its open-ended arbitrage fund — Franklin India Arbitrage Fund (FIAF). The fund will aim to achieve capital appreciation and income by predominantly investing in arbitrage opportunities in the cash and derivative segments of equity markets, as well as arbitrage opportunities within the derivative segment, with the remainder allocated to debt and money market instruments. The fund will be managed by Rajasa K, VP & Portfolio Manager, Emerging Markets Equity – India; Yogik Pitti, Senior Manager, Emerging Markets Equity – Trading; and Pallab Roy, Portfolio Manager, India Fixed Income.

The New Fund Offer opens on November 4, 2024, and will close on November 18, 2024, during which units will be available at Rs. 10/- per unit.

The fund will employ an active investment strategy, adjusting its defensive or aggressive postures depending on available opportunities. It will aim to capitalize on the implied cost of carry between the underlying cash and derivatives market, offering potential returns for investors. Furthermore, holding arbitrage funds for over a year will allow investors to benefit from lower capital gains tax rates, making it a tax-efficient investment option.

Speaking on the launch of the fund, Avinash Satwalekar, President, of Franklin Templeton–India, said, “Arbitrage funds in India are ideal for investors seeking short-term income generation without exposing their investments to high risk. Franklin India Arbitrage Fund is a valuable addition to our investment portfolio as we continue to expand our product suite to meet the varied needs of our investors, based on their risk profiles. As this is a low-risk fund, it is a valuable investment opportunity for both individual and institutional clients in India.”

NFO Features

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

The above product labeling assigned during the New Fund Offer (NFO) is based on an internal assessment of the scheme characteristics or model portfolio and the same may vary post-NFO when the actual investments are made.

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