Kotak Arbitrage Fund has emerged as a top performer among large arbitrage schemes, delivering a 7.1% three-year CAGR. While the fund ranks highly, it has trailed its benchmark index, highlighting the importance of evaluating returns across different periods. Investors should track how market volatility and pricing gaps influence the returns of these hybrid funds.
Kotak Arbitrage Fund has secured the top position among large arbitrage mutual funds based on three-year compound annual growth rate returns. As of August 2026, the fund manages a significant asset base of approximately ₹74,398 crore, making it one of the largest schemes in its category. This leadership in long-term returns places it ahead of peers like UTI Arbitrage Fund and SBI Arbitrage Opportunities Fund, which have also shown competitive performance in the same period.
Despite this strong ranking, the fund has underperformed its benchmark index. Over the three-year period, the fund trailed the NIFTY 50 Arbitrage Total Return Index by 0.6 percentage points. The gap was more pronounced over a one-year timeframe, where the fund lagged the benchmark by 1.4 percentage points. This difference highlights that even top-performing funds in this category do not always mirror or exceed the benchmark index.
Performance in the arbitrage category is dynamic and often shifts based on the timeframe being measured. While Kotak Arbitrage Fund holds the lead for the three-year period, other funds, such as the HDFC Arbitrage Fund, have recorded higher returns over shorter durations, including one-month, three-month, and one-year periods. This variation suggests that investors should not rely on a single timeframe to judge a fund's quality but should instead look at consistency across multiple market cycles.
Arbitrage funds operate by profiting from price discrepancies between the cash and derivatives markets. Their returns are primarily driven by the availability of these spreads and the overall liquidity in the market. In 2026, the arbitrage category has generally been one of the better-performing hybrid segments, supported by high market volatility that creates more opportunities for these funds to capture price differences.
Investors considering these funds should account for several factors beyond just historical returns. The expense ratio, which can range between 2.38% and 2.97% for various plans, directly impacts the net returns received by the investor. Additionally, these funds are subject to market risks; if market volatility decreases or if there are fewer opportunities for arbitrage, the returns can narrow. Taxation is another crucial factor, as these funds are typically taxed under equity-oriented rules, though changes in government policy can alter this landscape.
The most important monitorable for investors remains the consistency of the fund manager in capturing spreads in varying market conditions. As market cycles shift, the ability of a fund to manage liquidity and minimize the gap between its performance and the benchmark will be the key metric to track in upcoming quarterly and annual reviews.