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Market Intelligence › Basic Terminologies
Returns from the gap between cash and futures, and when that gap shrinks
Published by The Retail Trader · AUG 02, 2026 · Mutual Funds & AMC
An arbitrage fund invests in equity, but its return does not come from the direction of the market. It comes from the gap between the cash and futures markets.
The fund buys a stock in the cash market and sells the futures of the same stock. At expiry the prices of the two converge, and the gap in between becomes the fund's return.
Because the two positions cancel each other out, a rise or fall in the market has no direct effect on it.
This return depends on market conditions:
• The higher the futures premium, the higher the return.
• In a quiet or falling market the premium shrinks and the return drops.
• This is not a guaranteed return — it changes from month to month.
• The equity taxation treatment sets it apart from debt alternatives.
The right use of an arbitrage fund is short- to medium-term parking of money, not wealth creation. Its return resembles debt and its tax treatment resembles equity — that combination is its entire use case.
This article is for education only — it is not a buy or sell recommendation, makes no claim of a guaranteed return, and is not advisory. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or the official source.