Beginner guide · 5-minute read
Hybrid and arbitrage funds, explained simply
Hybrid funds hold a mix of shares and bonds in one fund. Arbitrage funds are a special low-risk type: they earn from small price gaps between markets, but they're taxed like equity.
Checked on 14 Oct 2026 against SEBI's mutual fund rules and the Finance Act, 2026.
In one minute
- Main types
- Conservative (mostly bonds), balanced, aggressive (mostly shares), balanced advantage (shifts the mix), multi-asset (adds gold), equity savings, and arbitrage.
- Tax depends on the mix
- 65% or more in Indian shares: taxed like equity. More than 65% in debt: taxed at your slab rate. In between: 12.5% after 2 years, slab rate before.
- Arbitrage
- Holds shares with matching bets that cancel out the market risk, so it's taxed like equity while swinging very little.
- Planning ranges
- Before tax, a year: arbitrage 6–8%, conservative 7–9%, aggressive 8–12%.
How it works, with real numbers
₹1,00,000 for 5 years at 7% before tax, 30% slab: an arbitrage fund, taxed like equity, keeps about ₹1,40,255. A debt fund earning the same 7% keeps about ₹1,27,696.
Same return before tax, very different result after. That's why the fund's tax category matters as much as its return.
Your money ₹1,00,000Arbitrage growth after tax ₹40,255
Pros and cons
Good things
- One fund, balanced risk. Shares for growth, bonds for steadiness.
- Automatic rebalancing. Balanced advantage funds shift the mix for you.
- Arbitrage: low risk, equity tax. A tax-friendly place to park money for a year or more.
- Smoother ride. Fewer big drops than a pure equity fund.
Things to watch
- Tax rules vary by type. Check each scheme's mix to know how it's taxed.
- Arbitrage returns vary. They shrink when markets are calm and price gaps are small.
- Aggressive hybrids still fall. With mostly shares, they drop when markets drop.
- Fees. As with any fund, the expense ratio comes out every year.
Is it right for you?
Mistakes to avoid
- Assuming every hybrid is taxed like equity. Conservative hybrids are taxed at your slab rate.
- Expecting arbitrage funds to beat equity. They aim for FD-like returns, not stock-market ones.
Words you'll see
- Asset allocation
- How money is split between shares, bonds and other assets.
- Arbitrage
- Earning from a price difference for the same thing in two markets.
- Hedged
- Protected against market moves by an offsetting position.
- Rebalancing
- Shifting money back to the intended mix.
- NAV
- Net asset value: the price of one unit of the fund on a given day.
- Units
- What you own in a fund; your money buys units at the day's NAV.
- Expense ratio
- The fund's yearly fee, taken out of the fund before returns reach you.
Try it with your own numbersSee the tax, what you keep, and how it compares with other options.
This guide explains how things work. It is not advice on what you should invest in. NetReturns is not SEBI-registered.