Zerodha Fund House has launched the Zerodha Arbitrage Fund, an open-ended equity scheme designed to capitalise on arbitrage opportunities between the cash and derivatives segments. According to reports from Mint, Moneycontrol, The Economic Times, and The Economic Times, the New Fund Offer (NFO) features a minimum subscription threshold of ₹5,000 and will close on August 14. The fund will reopen for continuous sale and repurchase within five business days from the date of allotment. The scheme targets investors seeking a low-volatility venue to park surplus funds for relatively brief holding periods compared to conventional equity funds.
The fund maintains a minimum 65% allocation toward equity and equity-linked derivatives, with the actual allocation ranging from 65-100% in equity and equity-related instruments including derivatives. As reported by The Economic Times, the remaining 0-35% may be allocated to debt and money market instruments, cash & cash equivalents, including units of mutual funds. Unlike directional equity schemes, an arbitrage fund does not rely on market rallies to generate yields. The strategy seeks to capture temporary price differences between a stock and its corresponding derivative contract, with returns dependent on market volatility, available spreads, execution costs, and debt market yields. When viable arbitrage spreads shrink, the fund temporarily parks money in short-term debt instruments in accordance with the investment strategy. According to Zerodha Fund House, the scheme will invest at least 65% of its portfolio in a combination of equity and equity derivatives, with the remaining portion parked in short-term debt instruments when adequate arbitrage opportunities are not available.
Because arbitrage funds maintain a minimum 65% equity exposure, they are taxed as equity-oriented mutual funds. According to Mint, Moneycontrol, The Economic Times, and The Economic Times, Short-Term Capital Gains (STCG) are taxed at a flat rate of 20% for units redeemed within 12 months, while Long-Term Capital Gains (LTCG) are taxed at 12.5% for gains exceeding ₹1.25 lakh in a financial year. For higher tax bracket individuals, this tax structure often yields better net returns than traditional short-term fixed-income products. However, investors should compare the expected returns, investment horizon, liquidity requirements and risk before choosing between arbitrage funds and traditional short-term parking options. As noted by Zerodha Fund House, the tax treatment makes arbitrage funds worth comparing with traditional short-term parking options, particularly for investors in higher income-tax slabs. Value Research notes that if mutual fund units are sold after 1 year from investment, gains up to ₹1.25 lakh are exempt from tax, while gains over ₹1.25 lakh are taxed at 12.5%. If sold within 1 year, the entire gain is taxed at 20%.
The Zerodha Arbitrage Fund will be managed by Kedarnath Mirajkar and will be benchmarked against the Nifty 50 Arbitrage Index TRI. As reported by The Economic Times and The Economic Times, the fund will seek to generate income by identifying and investing in arbitrage opportunities arising from price differentials between the cash and derivatives segments of the equity market, including opportunities across different derivative contracts and expiry periods of the same stock. The fund is suitable for investors who are seeking short-term parking of funds and a low volatility investment strategy based on arbitrage opportunities in equity markets along with exposure to debt and money market instruments. According to Zerodha Fund House, the scheme is generally used by investors looking to park money for a few months without taking the level of market risk associated with conventional equity funds, and can also be considered for surplus cash that may not be required immediately.
Arbitrage funds are generally considered for short-term cash management due to their tax treatment and low volatility profile. However, as reported by Zerodha Fund House, returns are not guaranteed and can vary depending on the availability of arbitrage opportunities, market conditions, costs and returns from the debt portion of the portfolio. The fund house emphasizes that arbitrage funds should not be treated as risk-free alternatives to bank deposits or other fixed-income products, as returns can fluctuate significantly. Investors should also check the scheme's exit load and other costs before investing. Value Research notes that arbitrage funds are suitable for parking emergency corpus or idle money for investors in the highest tax bracket, earning slightly higher returns than savings bank account with low-to-moderate volatility. The investment horizon is typically 3 months to 1 year, making them unsuitable for long-term wealth creation.
