HDFC Arbitrage Fund delivered a 1.5% return over the past three months, topping the category among funds with over ₹1,500 crore in assets. While this short-term performance is notable, data from ACE MF shows that other funds like Kotak Arbitrage and UTI Arbitrage often perform better over one-year or three-year periods. Investors should look beyond short-term snapshots when evaluating these schemes.
What Happened
HDFC Arbitrage Fund has secured the top spot in the arbitrage mutual fund category for the three-month period ending June 28, 2026, delivering a return of 1.5%. This performance places the fund slightly ahead of key industry competitors such as Kotak Arbitrage Fund and ICICI Prudential Arbitrage Fund, which recorded similar returns over the same timeframe. This comparison focuses on larger funds within the category, specifically those managing more than ₹1,500 crore in assets under management (AUM), based on data compiled by ACE MF.
How Arbitrage Funds Work
Arbitrage funds are designed to generate returns by exploiting price differences between the cash market (where stocks are bought) and the futures market (where contracts are sold). Because the fund simultaneously buys and sells the same asset, the risk is typically lower compared to pure equity funds. These schemes are often used by investors as a tax-efficient alternative to liquid or debt funds, as they are taxed at equity rates. However, their ability to generate these returns depends heavily on market volatility; higher market volatility often creates wider price gaps, which the fund can capture.
The Short-Term vs. Long-Term View
While HDFC Arbitrage Fund leads in the current three-month window, the leadership changes significantly when looking at longer horizons. For instance, Kotak Arbitrage Fund, which maintains the largest asset base in the segment with over ₹72,000 crore, leads in both the six-month and three-year return categories. Specifically, it recorded a 3.1% return over six months and a 7.0% return over three years. Similarly, when examining one-year performance, UTI Arbitrage Fund emerges as the leader with a 6.0% return.
Benchmarking Performance
Comparing a fund’s performance against its specific benchmark provides a clearer picture of how well the fund manager is executing the arbitrage strategy. For HDFC Arbitrage Fund, the data indicates it outperformed its benchmark by 1.7 percentage points over a one-year period, with the benchmark itself returning 4.3%. Over a three-year period, the fund beat its benchmark by 0.5 percentage points. This suggests that the fund has been effective at capturing alpha, or returns above the market benchmark, but investors should be aware that these margins can fluctuate based on market conditions.
What Investors Should Track
When selecting an arbitrage fund, investors should look beyond recent performance rankings. The key metrics to monitor include the expense ratio—the fee charged by the fund house—and the exit load, which is a fee charged if money is withdrawn before a certain period. Additionally, as these funds rely on market inefficiencies, investors should monitor the fund’s consistent ability to beat its benchmark over 1, 3, and 5-year periods rather than focusing only on the latest quarter.