Following an initial surge of volatility linked to the new closing auction mechanism, arbitrage fund net asset values have now largely settled, with market participants emphasising the transient nature of the disruption as the category remains a low-volatility investment option.
Arbitrage fund net asset values have settled after an abrupt burst of volatility linked to the new closing auction session mechanism, with the initial swings now largely gone from daily performance, according to Business Standard. The category’s NAVs jumped by about 0.5% on the first day of the change, a move roughly equal to a month’s typical return, before giving back almost all of that rise over the next three trading sessions.
By August 14, one-month returns for arbitrage funds averaged 0.45%, which Business Standard said was back within the category’s normal range. The early move had created a risk for new investors, who could have bought units at temporarily inflated NAVs, prompting distributors to advise caution and, in some cases, staggered allocations while the market adjusted.
Market participants quoted by Business Standard said the disturbance was mainly a valuation effect tied to changes in execution and hedging under the new process, not a change in the basic arbitrage trade between cash and derivatives. Ankur Punj of Equirus Wealth said such disruptions are unusual and should ease as fund managers adapt, while Anup Bhaiya of Money Honey Wealth Services said the episode did not alter the core strategy of capturing mispricings with limited directional risk. The wider market context also helps explain the move: index rebalancing and closing auction activity can generate heavy, price-insensitive trading at the close, as other market commentaries on closing-auction volatility have noted.
For investors, that means arbitrage funds still look like a short-term parking option rather than a source of high returns. Bhaiya said they can remain useful for lump-sum money over the short to medium term because they are relatively low-volatility and more tax-efficient than traditional fixed deposits.
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