Invesco India Arbitrage Fund delivered a 6.1% return over the last year, leading the arbitrage mutual fund category among larger schemes. With UTI and SBI following closely, investors are evaluating these funds as low-risk options for parking cash. Understanding the underlying factors, such as market volatility and price spreads, is essential for assessing these returns.
What Happened
Invesco India Arbitrage Fund has secured the top spot for one-year performance in the arbitrage mutual fund category. As of June 25, 2026, the fund recorded a Compound Annual Growth Rate (CAGR) of 6.1%. This performance places it slightly ahead of peers like the UTI Arbitrage Fund and SBI Arbitrage Opportunities Fund, both of which delivered 6.0% returns over the same period. The analysis covers funds with Assets Under Management (AUM) of at least Rs 1,500 crore.
Top Performers Across Timeframes
While Invesco India leads the one-year rankings, performance leaders vary depending on the timeframe. For instance, the Kotak Arbitrage Fund holds the largest corpus among the top five funds, with Rs 72,079.2 crore. When looking at longer horizons, both Kotak Arbitrage Fund and UTI Arbitrage Fund have delivered a 7.0% CAGR over the past three years. Shorter-term results also differ, with the HDFC Arbitrage Fund leading in the three-month period at 1.5%, and the UTI Arbitrage Fund topping the one-month returns at 0.8%.
Why Arbitrage Funds Perform Differently
Arbitrage funds primarily generate returns by exploiting price differences between the cash market and the derivatives market. Because these funds use complex hedging strategies, their performance is not based on direct stock price movement. Instead, it relies on the "spread," which is the difference in price between buying a stock in the cash market and selling it in the futures market. If this spread narrows due to low market volatility or changes in interest rates, the potential returns for the fund can decrease.
Risks and Important Monitorables
Investors often use arbitrage funds as a tax-efficient way to park money for the short term compared to traditional savings accounts. However, these funds are not risk-free. The biggest factor influencing returns is the market volatility required to create price spreads. If market conditions remain stable for a long time, arbitrage opportunities shrink, which directly impacts the fund's yield. When evaluating these funds, investors should not look only at the latest returns. It is useful to compare long-term performance across different market cycles to understand how the fund manager handles periods where arbitrage spreads are tight.