Kotak Arbitrage Fund clocked a 3.1% return in the last six months, leading among major arbitrage funds with over ₹1,500 crore in assets. While the fund manages a massive ₹72,079 crore corpus, investors should note that returns fluctuate across timeframes, and performance has lagged its benchmark over the one and three-year periods.
What Happened
Kotak Arbitrage Fund has secured the top position among large arbitrage mutual funds for the six-month period ending June 2026, delivering a 3.1% return. This performance puts it slightly ahead of peers like HDFC Arbitrage Fund and HSBC Arbitrage Fund, which recorded gains of 3.1% and 3.0% respectively during the same timeframe. The comparison includes funds with an assets under management (AUM) of at least ₹1,500 crore, highlighting Kotak Arbitrage Fund’s substantial market presence with its massive ₹72,079.2 crore corpus.
The Performance And Benchmark Picture
While the fund leads in the recent six-month window, its longer-term performance shows a different trend. Data indicates that over a one-year period, the fund’s returns trailed its benchmark by 1.0 percentage point, with the benchmark delivering 7.0%. Similarly, on a three-year basis, the fund recorded a 7.0% return compared to the benchmark’s 7.6%.
This variation is common in arbitrage funds, where the benchmark often represents a theoretical spread that may not always be fully captured after accounting for fund expenses, cash holdings, and the specific debt-market instruments held in the portfolio. Investors often use these funds as a short-term parking option for surplus cash, but consistent benchmark-beating performance can be challenging for larger funds.
Why The Size Of The Fund Matters
Managing over ₹72,000 crore brings both advantages and challenges. A large corpus provides high liquidity, allowing investors to enter or exit with ease. However, for an arbitrage fund, size can sometimes be a constraint. These funds rely on identifying price gaps between the spot (cash) market and the futures market. When a fund is very large, the fund manager must deploy massive amounts of capital. Finding enough of these temporary price discrepancies to keep such a large amount of money effectively 'at work' can become difficult, sometimes forcing the fund to park the remainder in liquid or debt instruments.
Understanding The Risk And Strategy
Arbitrage funds work by simultaneously buying shares in the cash market and selling them in the futures market to capture the price spread. This strategy is generally considered low-risk because the market position is hedged. However, these funds are not risk-free.
As per SEBI guidelines, these funds must hold at least 65% in equities or equity-related instruments to qualify for equity-oriented taxation. The remaining portion is often invested in debt and money market instruments. It is this debt component that carries potential risk—if the debt instruments in the portfolio face credit issues, it could impact the Net Asset Value (NAV), as seen historically in other funds in the category.
What Investors Should Track Next
Investors considering these funds should look beyond short-term returns. The key monitorables include the fund's expense ratio, which can significantly impact net returns in a category where the spread itself is thin. Additionally, investors should observe how the fund manages its debt portion, as this is the primary source of risk rather than the equity-hedged portion. Understanding the tax efficiency—given that these are taxed as equity funds—is also crucial for those in higher income tax brackets comparing these against traditional bank deposits or liquid funds.