UTI Arbitrage Fund: A tax efficient option of parking your short-term funds

Arbitrage funds have been in focus in recent times. In the last 3 years, the yield gap between arbitrage funds and savings bank account have widened. Furthermore, the yield / return gap between arbitrage funds and liquid funds have narrowed (see the chart below). On a post-tax basis, arbitrage funds enjoy the advantage of equity taxation, while fixed income investments are taxed as per the income tax rate of the investor.

In current market conditions arbitrage funds can be good, tax efficient option for parking your surplus funds. In this article, we will review one of the top performing arbitrage funds, UTI Arbitrage Fund.

Source: Advisorkhoj Research, as on 15^th July 2025

How does arbitrage work?

Let us assume that a stock is trading at Rs 100 in the cash market and for Rs 102 in the F&O (derivatives) market. You can lock in risk free profits by simultaneously buying shares of the stock in cash market and selling same number of futures in the F&O market. On expiry of futures, last Thursday of the month (depending on the F&O series), the cash (spot) price and futures price will converge. On expiry of the futures the market value of your long (cash) and short (futures) position will be equal in value irrespective of the direction (up or down) of price movement since the initiation of the trades. You can see in the table below that arbitrage profit is the same whether the share price moves up or down. Please note that, fund managers may not wait till expiry to square off their trades. They may square off before expiry depending on the price difference and profit-making opportunity.

Disclaimer: Table above is purely illustrative of investor education purposes. Arbitrage funds have to incur transaction costs which can impact the profitability of the strategy.

Arbitrage returns depend on market conditions

Though arbitrage funds are low risk investments, their returns can vary depending on market conditions. The chart below shows the relationship between India VIX (volatility index) and Nifty 50 Arbitrage Index daily returns (7 day moving average) over the last 1 year. You can see that arbitrage returns usually increase with volatility.

Source: National Stock Exchange Advisorkhoj Research, as on 15^th July 2025

About UTI Arbitrage Fund - A consistent top performer

UTI Arbitrage Fund has a track record of 19+ years and has consistently been a top performer in its category. The chart below shows the quartile rankings of the UTI Arbitrage Fund over the past 12 quarters. You can see that the fund has been in top 2 quartiles for the last 11 consecutive quarters and in the topmost quartile for the last 8 consecutive quarters.

Source: National Stock Exchange Advisorkhoj Research, as on 30^th June 2025

UTI Arbitrage Fund outperformed peers in different market conditions

The chart below shows the 1 year rolling returns of UTI Arbitrage Fund versus the category average rolling returns from 1^st January 2020. You can see that UTI Arbitrage Fund outperformed its peers across different market conditions.

Source: Advisorkhoj Research, as on 15^th July 2025

UTI Arbitrage Fund - Tax Advantage

One major advantage of arbitrage funds versus fixed income investments is equity taxation. Short term capital gains (investment holding period of less than 12 months) will be taxed at 20%. Long term capital gains are tax free up to Rs 1.25 lakhs and taxed 12.5% thereafter.

Why invest in UTI Arbitrage Fund?

• No price risk since the equity exposure of arbitrage funds is completely hedged.


• Potential higher returns compared to savings bank interest rate.


• Unlike liquid funds, there is no credit risk in arbitrage funds.


• There is no counterparty risk since settlement of all futures contracts (including futures contract settlements in arbitrage trades) are guaranteed by the stock exchange.


• You can invest in the fund for the purpose of investing through Systematic Transfer Plan into UTI MF equity or hybrid schemes to take advantage of market volatility through Rupee Cost Averaging. You should refer to scheme information document to know the exit load structure of the scheme and plan accordingly.


• UTI Mutual Fund is one of the most trusted names in mutual funds.


• UTI Arbitrage Opportunities Fund has a strong 19 year performance track record.


• Advantage of equity taxation.