With interest rates expected to ease, these tax-efficient funds may be just right for you

Subscribe to enjoy similar stories. Recent monetary policy decisions in both the United States and India indicate a shift towards easing interest rates. The US Fed has been signaling that there is a need to keep the policy rate accommodative and is open to rate cuts if the data supports this.

In its latest summary of economic projections, Fed members indicated easing of rates by 50 basis points (bps) in calendar year 2025. The Reserve Bank of India (RBI) reduced its key interest rate by 25 bps to 6.25% in February, its first rate cut since 2020, as it looked to support economic growth amid easing inflation. Meanwhile, equity market volatility is being fueled by geopolitical tensions, slowing economic growth, and uncertain corporate earnings.

As a result, investors are increasingly seeking alternative strategies that can balance risk and returns. Arbitrage funds capitalise on price discrepancies between the cash and futures markets. Fund managers buy securities in the cash market and sell equivalent positions in the futures market, locking in risk-free profits from these differences.

Typically, these funds allocate about 65-75% to cash future arbitrage opportunities and the remaining to debt and money market instruments. Also read: Mumbai circle rate revised; property prices increased at 3% CAGR in 10 years The pricing of futures contracts incorporates the cost of carry, which includes the risk-free rate, often benchmarked to instruments such as short term debt issuances. As interest rates decline, the spreads between cash and futures prices tend to narrow, potentially reducing returns from arbitrage strategies.