Arbitrage funds have emerged as the best-performing hybrid mutual fund category in 2026 so far, according to category performance data.
The category has generated a 3.35% year-to-date (YTD) return, making it the best-performing segment among hybrid mutual funds in 2026 so far. It has narrowly outpaced Income Plus Arbitrage Funds, which have returned 3.28%, while the remaining hybrid categories have lagged considerably.
Conservative Hybrid Funds have gained 1.55%, and returns from Multi Asset Allocation and Equity Savings Funds have remained below 1.5%. Meanwhile, Aggressive Hybrid Funds and Dynamic Asset Allocation Funds have slipped into negative territory this year.
What are arbitrage funds?
Arbitrage funds are hybrid mutual fund schemes that seek to generate income by simultaneously buying securities in the cash market and selling equivalent securities in the derivatives market to benefit from the price differential between the two markets.
Since the equity positions are largely hedged, arbitrage funds are generally less sensitive to movements in the stock market than conventional equity funds. The unhedged portion of the portfolio may be invested in debt and money market instruments in accordance with the scheme’s investment objective.
Under the Securities and Exchange Board of India (SEBI)’s mutual fund categorisation framework, arbitrage funds are classified as hybrid schemes and are required to invest a minimum of 65% of their total assets in equity and equity-related instruments. Owing to this equity allocation, they are treated as equity-oriented mutual funds for taxation purposes under the Income-tax Act.
Returns from arbitrage funds depend on the availability of arbitrage opportunities, which can vary with market conditions.
The top-performing arbitrage funds over one year and three years
Although arbitrage funds invest using a similar strategy, returns vary across schemes based on factors such as the availability of arbitrage opportunities, execution and portfolio management.
Quant Arbitrage Fund has delivered the highest return over the past one year at 7.57%. It is followed by WhiteOak Capital Arbitrage Fund, which has returned 7.10%, and Motilal Oswal Arbitrage Fund, with a return of 7.06%.
Over a three-year period, Tata Arbitrage Fund has delivered the highest annualised return among arbitrage funds at 7.64%. It is closely followed by Kotak Arbitrage Fund with an annualised return of 7.63%, while Invesco India Arbitrage Fund ranks third with 7.61%.
The rankings indicate that while arbitrage funds follow a similar investment approach, there are differences in returns across schemes over different time periods. Investors should evaluate a scheme’s investment objective, portfolio characteristics, risk factors and track record before making an investment decision.