Arbitrage funds vs liquid funds: the 2026 scorecard

The number

Over the twelve months to 30 September 2026, the median arbitrage fund returned 6.68%. The median liquid fund returned 6.46%.

An arbitrage fund buys shares and sells the same shares in the futures market at a slightly higher price, then pockets the difference as the two converge. It carries little market risk, earns something close to a short-term interest rate, and because it is mostly in equity it is taxed like an equity fund. That last point is why it is so often weighed against a liquid fund.

All figures come from daily NAVs as of 30 September 2026, Direct plan, Growth option. The one-year and longer figures count only funds at least a year old: 33 arbitrage funds and 38 liquid funds.

Period by period

Over one, three and five years, arbitrage funds came out ahead by between 0.22 and 0.38 points a year. Over six months they were behind, by 0.28 points.

That six-month figure is the useful one. Arbitrage returns depend on the gap between the share price and the futures price, and that gap moves with demand for futures. So the lead over liquid funds is not steady from one stretch of months to the next, and over April to September 2026 it reversed.

Of the 33 arbitrage funds with a full year, 25 beat the liquid median.

The spread within arbitrage

The range runs from 5.17% to 7.73%, a 2.56-point gap. For liquid funds over the same year it was 0.81 points.

The four at the top are all young, too new for a three-year figure. A small fund can use the best opportunities fully; whether that lasts as it grows is an open question. Among funds with three years of history, the best one-year figure was Invesco India Arbitrage Fund's 6.84%.

The swings are small but real

A liquid fund's NAV almost never falls from one day to the next. An arbitrage fund's does, because the shares and futures are valued at slightly different moments, and the gap between them moves day to day.

Over three years the median arbitrage fund's worst fall from a peak was 0.44%, and its volatility more than six times a liquid fund's. That is small in rupees. But anyone who needs the money in a particular week should know the NAV can be a little lower than it was the week before.

The tax difference, briefly

This is usually what decides it.

• Liquid fund: gains on units bought after 1 April 2023 are added to your income and taxed at your slab rate, whatever the holding period.
• Arbitrage fund: taxed as an equity fund. Gains on units held under a year are taxed at 20%. Over a year, gains above ₹1.25 lakh in the year are taxed at 12.5%.

For someone in the 30% slab, the after-tax gap is far larger than the 0.22-point pre-tax gap in the table. For someone with little taxable income, the difference shrinks. The capital gains tax calculator works through a specific case.

What this does not tell you

It is one year in which arbitrage did well. Spreads change with market conditions, and arbitrage returns can fall below liquid fund returns for months at a time. Over the last six months they already have.

Exit loads differ. In their Scheme Summary Documents, 37 of the 40 arbitrage funds charge an exit load, most often 0.25% on units sold within 7 to 30 days. Liquid funds charge a small one only within seven days.

Past returns don't predict. The table says what each category earned to 30 September 2026, not what either will earn next.

Where to go from here

The arbitrage fund page lists every scheme, and the cash-parking arbitrage screen ranks them. The guide to arbitrage funds explains how the trade works.

For the full liquid and overnight picture, see how tight liquid fund returns were this year.