Last week, three NRI clients from Dubai asked us the same question: "Should I put my surplus rupees into an arbitrage fund instead of keeping them in my NRO savings account?"
One had heard about 7-8% returns with "equity taxation benefits." Another saw it recommended on an NRI WhatsApp group. The third read that arbitrage funds are "risk-free."
Here's the truth: Arbitrage funds aren't risk-free, but they can be smarter than letting rupees sit idle. They're also not suitable for everyone.
If you're living in the UAE and keeping money in India for 3-12 months before repatriating it, arbitrage funds deserve a serious look. But if you're investing for the long term or need capital protection guarantees, you might be disappointed.
At Belong, we help NRIs navigate these exact decisions through our investment tools and WhatsApp community. This guide covers everything you need to know about arbitrage mutual funds as an NRI investor.
Why Are NRIs Looking at Arbitrage Funds in 2025?
Three things changed this year.
First, traditional NRI fixed deposit rates have stayed range-bound between 6.5-7.5% for NRE and NRO accounts. Banks are offering limited upside, and NRIs want better returns without taking equity market risks.
Second, the new capital gains tax regime made arbitrage funds more attractive for short-term parking. Short-term capital gains on equity-oriented funds are now taxed at 20% instead of at your income slab, which benefits high-income NRIs in the 30% bracket.
Third, rupee volatility has NRIs thinking differently. The INR has been weakening against major currencies, and parking money for 6-12 months in instruments that beat inflation makes sense. You can track this live on our Rupee vs Dollar tracker.
What Exactly Are Arbitrage Mutual Funds?
Think of arbitrage funds as the financial equivalent of buying mangoes in Mumbai and selling them in Dubai the same day for a higher price. The profit comes from the price difference, not from the mangoes themselves.
Arbitrage funds are hybrid mutual funds that invest at least 65% in equity and equity-related instruments. But unlike regular equity funds that buy stocks and hope they go up, arbitrage funds buy and sell the same stock simultaneously in two different markets to capture guaranteed price differences.
The fund manager exploits the gap between:
- Cash market (spot market where you buy shares today)
- Futures market (where you agree to buy/sell shares at a future date)
When a stock trades at ₹100 in the cash market and ₹101 in the futures market, the arbitrage fund buys at ₹100 and sells at ₹101, locking in ₹1 profit per share. Multiply this across hundreds of stocks daily, and you get 7-8% annual returns.
👉 Tip: Arbitrage funds are technically "equity funds" but behave like debt funds. This classification gives them tax advantages we'll cover next.
The Cash vs Futures Mechanism (Explained Simply)
Let us walk you through a real example.
Suppose Reliance Industries is trading at:
- Cash market: ₹2,500
- 1-month futures: ₹2,515
An arbitrage fund manager:
- Buys 10,000 Reliance shares in cash market for ₹2.5 crore
- Simultaneously sells 10,000 Reliance futures for ₹2.515 crore
- Locks in ₹1.5 lakh profit (₹15 × 10,000 shares)
When the futures contract expires in 30 days, the prices converge. The fund has already locked in the profit and eliminated price volatility risk.
The remaining 35% of the fund sits in high-quality debt instruments like commercial paper or treasury bills, generating additional interest income.
Here's the critical part for NRIs: Since both buy and sell prices are predetermined, arbitrage funds carry negligible stock market risk. You're not betting on whether Reliance goes up or down. You're capturing the price gap between two markets.
Tax Treatment: The Big Win for NRIs in Higher Brackets
This is where arbitrage funds shine for NRIs.
Arbitrage funds are classified as equity funds for taxation since they hold at least 65% in equities. This gives you:
Short-Term Capital Gains (less than 12 months): 20% flat tax + applicable surcharge and 4% cess
Long-Term Capital Gains (more than 12 months): 12.5% tax on gains above ₹1.25 lakh per year + applicable surcharge and 4% cess
Compare this with:
- NRO FD interest: Taxed at 30% + surcharge + cess (for most NRIs in UAE)
- Debt fund STCG: Taxed at your income slab rate (up to 30%)
- Regular savings account: Taxed at slab rate
If you're in Dubai earning a good salary and fall in India's 30% tax bracket, arbitrage funds can save you 10% in taxes on short-term gains versus debt fund interest.
👉 Tip: NRIs must have a PAN card for these tax rates to apply. Without PAN, TDS is deducted at 20% or higher. Read our guide on PAN card for NRIs.
But there's a catch: TDS is automatically deducted when you redeem. You'll need to claim refunds while filing your NRI tax returns.
Real Returns: What NRIs Actually Earn (With Current Data)
Based on 2025 data, here's what top arbitrage funds are delivering:
Fund Name | 1-Year Return | 3-Year Return | Expense Ratio |
|---|---|---|---|
Invesco India Arbitrage Fund (Direct Plan - Growth) | 7.22% | 7.85% | 0.40% |
HDFC Arbitrage Fund (Direct Plan - Growth) | 7.01% | 7.60% | 0.40% |
Kotak Arbitrage Fund (Direct Plan - Growth) | 7.20% | 7.84% | 0.43% |
Source: Moneycontrol Arbitrage Funds Performance Tracker
In 2025, most arbitrage funds have delivered annualized returns between 7% and 7.8%, outperforming many NRO and NRE fixed deposits on a post-tax basis.
But here's what the brochures don't tell you: These returns fluctuate based on market volatility. Arbitrage funds do not have a traditional yield-to-maturity (YTM) like debt funds, but indicative pre-expense spreads were around 7.2–7.5% in early 2025, narrowing to 6.9–7.2% over the past six months (April–October 2025).
In flat or stable markets (like we saw in mid-2024), arbitrage opportunities shrink. Returns can drop to 6.0–6.5% when there's no price difference between cash and futures markets.
Source:
- Moneycontrol Arbitrage Funds Performance Tracker (as of 30-Oct-2025)
- ICICI Prudential Arbitrage Fund Factsheet – October 2025
- Value Research Arbitrage Fund Category Performance
Arbitrage Funds vs NRI Fixed Deposits: An Honest Comparison
Here's the comparison no one talks about honestly:
Feature | Arbitrage Funds | |
|---|---|---|
Returns | 7.0-7.8% (variable) | 6.5-7.5% (fixed) |
Tax on Returns | 20% STCG or 12.5% LTCG | Interest taxed at 30% slab (NRO) / Tax-free (NRE) |
Capital Protection | No (but very low risk) | Yes (DICGC insured up to ₹5 lakh) |
Liquidity | Exit anytime (may have exit load for first 30 days) | Premature withdrawal with penalty |
Market Risk | Very low (hedged positions) | Zero |
Suitable For | 3-12 month parking, high tax bracket | 1-5 year goals, capital safety |
Repatriation | Through NRE/NRO account | Built-in for NRE |
When arbitrage funds win:
- You're in the 30% tax bracket
- Money is parked for 6-12 months
- You want better post-tax returns than FDs
- You're comfortable with variable (not fixed) returns
When FDs win:
- You need guaranteed capital protection
- Your investment horizon is 1-3 years
- You want predictable returns for financial planning
- You qualify for senior citizen FD rates (8%+)
For deeper FD comparisons, check our NRI FD comparison tool which compares rates across 50+ banks.
Arbitrage Funds vs Debt Funds: Why They're Different Now
This is where 2025 tax changes matter.
For debt funds purchased after April 1, 2023, all gains are taxed at your income slab rate - no indexation, no long-term benefits. This makes debt funds less attractive for NRIs in high tax brackets.
Example: You're an NRI in Dubai in the 30% tax bracket. You invest ₹10 lakh for one year.
Debt Fund:
- Returns: 7.5%
- Gain: ₹75,000
- Tax: ₹22,500 (30% of gain)
- Post-tax return: 5.25%
Arbitrage Fund:
- Returns: 7.5%
- Gain: ₹75,000
- Tax: ₹15,000 (20% STCG)
- Post-tax return: 6%
The arbitrage fund gives you 75 basis points more after tax. Over ₹50 lakh, that's ₹37,500 extra in your pocket annually.
👉 Tip: If you're investing through an NRO account for 1-2 years, arbitrage funds make more sense than debt funds for amounts above ₹10 lakh. For guidance, check our taxation of mutual funds for NRI guide.
Also Read -Best Mutual Funds for NRIs to Invest in India
The Volatility Advantage (Yes, You Read That Right)
Here's something counterintuitive: Arbitrage funds actually perform better when markets are volatile.
When the overall market experiences ups and downs, arbitrage opportunities become more frequent. Price differences between cash and futures widen during uncertainty, giving fund managers more profit pockets to exploit.
During the market volatility in February 2025, when the Sensex dropped 2.5% in a week, arbitrage funds demonstrated resilience and continued delivering 7%+ returns while equity funds fell sharply.
This is why financial advisors recommend arbitrage funds as a "parking lot" for money during uncertain times. You get debt-like stability with equity-like taxation.
But don't confuse this with equity returns. Arbitrage funds typically have limited profit potential because the price differential is generally small. You're not going to make 15-20% like an equity fund might in a bull market.
Also Read - Types of Mutual Funds
Repatriation: Can You Bring the Money Back to Dubai?
This is the question every NRI asks, and the answer is: Yes, but with paperwork.
Arbitrage funds can be purchased through either:
- NRE account (repatriable)
- NRO account (repatriable up to USD 1 million per year)
When you redeem your arbitrage fund units:
- Sale proceeds credited to your NRE/NRO account
- TDS deducted automatically by the fund house
- For NRE investments: Fully repatriable, no limits
- For NRO investments: Repatriable up to USD 1 million per financial year under the Liberalized Remittance Scheme (LRS)
Also Read -How to Repatriate Funds from NRO/NRE Accounts
When NRIs redeem mutual fund investments, proceeds are credited to their NRE or NRO account, with TDS applied as per applicable tax laws.
You'll need to submit:
- Form 15CA and 15CB (for NRO repatriation)
- CA certificate (if remitting over certain limits)
- Investment proof
Read our detailed guide on NRE vs NRO vs FCNR accounts to understand which account suits your needs.
👉 Tip: If you're planning to repatriate within 6-12 months, invest through your NRE account to avoid LRS documentation hassles.
How to Invest as an NRI (Step-by-Step)
Unlike residents, NRIs face additional steps. Here's the exact process:
Step 1: Complete KYC KYC compliance is mandatory before investing. Required documents include PAN, passport copy, overseas address proof, photograph, and visa copy.
Most platforms now offer video KYC for NRIs. Belong's concierge service handles this for busy NRIs in Dubai and Abu Dhabi.
Step 2: Open NRE or NRO Account You need an Indian bank account. The NRE Account is used to invest on a repatriable basis; NRO Account is used for non-repatriable basis.
Check our guide on best NRI accounts for 2025 recommendations.
Step 3: Choose Your Investment Platform Options include:
- Direct AMC websites (Invesco, Kotak, HDFC)
- Aggregator platforms (Groww, Zerodha Coin, INDmoney)
- Distributor platforms
Step 4: Select the Fund Look for:
- Consistent 3-year returns (7.6-7.8% range)
- Low expense ratio (under 0.5%)
- Large AUM (over ₹5,000 crore shows credibility)
- Exit load structure
Step 5: Choose SIP or Lumpsum
- SIP: ₹500-1,000 minimum monthly. Good for rupee cost averaging
- Lumpsum: ₹5,000-10,000 minimum. Better for parking idle funds
Step 6: Link Your Bank Account Enable auto-debit for SIPs through your NRE/NRO account. International credit cards typically don't work.
Also Read - Best SIP Options for NRIs – Step by Step Guide
Step 7: Monitor Quarterly Track performance through the fund house app or aggregator. Arbitrage funds should deliver consistent 1.5-2% quarterly returns.
For personalized guidance, join our WhatsApp community where our advisors answer NRI-specific investment questions daily.
Risks You Need to Know (The Uncomfortable Truth)
Let's talk about what can go wrong.
1. Return Uncertainty
Arbitrage funds are not 100% risk-free. During stable market conditions, arbitrage opportunities may disappear. Your 7.5% expected return can become 5.5% if markets trade flat for 6 months.
2. Exit Loads
Most funds carry exit loads if you redeem before 30 days (typically 0.25%). If you need emergency liquidity within a month, you'll pay a penalty.
3. Expense Ratios Eat Into Returns
The expense ratio can impact net returns. A 0.50% expense ratio on a 7% return means you're effectively earning 6.5%. Direct plans (0.40%) are better than regular plans (0.80%+).
4. Interest Rate Risk on Debt Portion
The 35% debt component is subject to interest rate changes. When RBI raises rates, existing debt holdings fall in value (though marginally).
5. Manager Expertise Matters
The fund manager has to be efficient in identifying arbitrage opportunities. Poor execution means lower returns. Stick to established funds with 5+ year track records.
6. Tax Law Changes
Tax treatment changed in 2024 and could change again. Today's 20% STCG might become 25% tomorrow.
7. Currency Risk (Specific to NRIs)
You're earning returns in INR. If the rupee depreciates 3% while you earn 7% in the fund, your real USD return is only 4%. Use our rupee depreciation calculator to track this.
When Arbitrage Funds DON'T Work (Critical Reading)
Let us be direct about when you should avoid arbitrage funds:
Don't invest if:
- You need the money within 3 months (exit loads + uncertainty)
- You're investing for retirement 10+ years away (equity mutual funds will do better)
- You need guaranteed returns for a specific goal (choose FDs)
- You're uncomfortable with any market exposure
- Markets are in a prolonged flat phase with low volatility
- You haven't completed your NRI KYC
Red flags:
- Any fund promising "guaranteed 10% returns"
- Funds with less than ₹500 crore AUM
- Expense ratios above 0.80%
- Funds that existed less than 2 years
Better alternatives exist when:
- For 3+ year goals: Best mutual funds like diversified equity or balanced advantage funds
- For USD returns: GIFT City fixed deposits with tax-free USD returns
- For tax-free growth: NRE fixed deposits
Why GIFT City USD FDs Might Be a Smarter Alternative
Here's an option most NRIs don't know about: GIFT City in Gujarat allows NRIs to open USD-denominated fixed deposits that are completely tax-free in India.
At Belong, we've helped hundreds of NRIs from Dubai switch from rupee instruments to USD deposits in GIFT City. Here's why:
GIFT City USD FDs:
- 4.5-6% returns in USD
- Zero tax in India
- No rupee depreciation risk
- Deposit amounts up to USD 100,000
- DICGC insurance protection
vs Arbitrage Funds:
- 7-8% returns in INR (pre-tax)
- 5.6% post-20% tax
- Exposed to rupee depreciation
- Returns vary with market conditions
If the rupee depreciates 3% annually (historical average), your arbitrage fund's 5.6% post-tax INR return becomes just 2.6% in USD terms. Meanwhile, the GIFT City FD gives you 4.5-6% in USD, tax-free.
Download the Belong app to compare live GIFT City FD rates versus traditional NRI investment options. Our GIFT City FD comparison tool shows exactly how much more you can earn.
👉 Tip: For amounts above $25,000 that you plan to repatriate in 1-3 years, GIFT City FDs almost always beat arbitrage funds after accounting for taxes and currency risk. Read our detailed guide on GIFT City investments and benefits for NRIs.
Common Mistakes NRIs Make With Arbitrage Funds
From our experience with 5,000+ NRI clients:
Mistake 1: Treating Them Like Equity Funds
Arbitrage funds won't give you 15% returns. If someone promises that, run away.
Mistake 2: Investing Through Regular Plans
Regular plans charge 0.40% more in expenses annually. On ₹10 lakh, that's ₹4,000 lost per year. Always choose direct plans.
Mistake 3: Not Checking DTAA Benefits
If you're a tax resident of UAE, you may prevent being taxed twice if India has a DTAA with your country. Check our DTAA India-UAE guide to claim treaty benefits.
Mistake 4: Forgetting About Form 15CA/15CB
When repatriating from NRO accounts, you need CA certificates and tax forms. Factor in ₹5,000-10,000 for this documentation. Our Form 15CA/15CB guide simplifies this.
Mistake 5: Not Comparing With FDs
Before investing, use our FD rates comparison tool to see if a simple FCNR deposit or GIFT City FD gives better risk-adjusted returns.
Mistake 6: Ignoring Exit Loads
Many funds impose exit loads, making them suitable for investors with a minimum 3-6 month horizon. Don't invest money you'll need in 60 days.
Mistake 7: Not Reading the Scheme Document
Every arbitrage fund has different strategies. Some are aggressive (higher equity allocation), others conservative (more debt). Read the factsheet before investing.
The Bottom Line: Are Arbitrage Funds Right for You?
Arbitrage funds make sense for NRIs in the UAE who:
- Keep ₹10 lakh+ in India for 6-12 months
- Fall in the 30% tax bracket
- Want better post-tax returns than NRO FDs
- Are comfortable with variable (not guaranteed) returns
- Have completed their KYC properly
They don't make sense if:
- You need guaranteed returns
- Your horizon is under 3 months or over 3 years
- You prioritize simplicity over tax efficiency
- You haven't evaluated GIFT City alternatives
At Belong, we're building tools and a community to help NRIs make smarter financial decisions. Our NRI FD comparison tool and GIFT City investment platform help you compare all options in one place.
Before you invest in arbitrage funds-or any INR instrument-ask yourself: "Will this beat GIFT City's tax-free USD returns after adjusting for rupee depreciation and taxes?" Often, the answer is no.
Next steps:
- Use our residential status calculator to confirm your tax status
- Compare arbitrage fund returns with GIFT City FD rates
- Join our WhatsApp community to ask questions to our financial advisors
- Download the Belong app to start investing in tax-efficient USD deposits
Remember: The best investment isn't the one with the highest return-it's the one that fits your goals, timeline, and risk appetite while minimizing taxes and currency risk. That's exactly what we help NRIs figure out, every single day.
Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. This article is for educational purposes only and should not be considered financial advice. Consult a SEBI-registered investment advisor before making investment decisions. Past performance does not guarantee future results.
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