1. Why This Post Exists

I’ve executed real‑world arbitrage - buying Reliance on the BSE and selling it on the NSE in the same breath (first by slamming my keyboard, later via co‑lo algos); squeezing pennies out of put‑call‑parity gaps; even locking bull‑call spreads, bear‑put spreads, and long butterflies for a credit. Those trades left zero market risk once hedged and vanished the moment another desk hit them.

So when I see Indian mutual funds pitch their cash‑and‑carry product as “arbitrage,” my spidey‑sense tingles. It’s carry. It’s debt with an equity tax wrapper. Useful, yes. Arbitrage, no. This post breaks down what these funds really do and where the landmines hide.

I have already done a deep dive on Arbitrage Funds here.

​2. What Actual Arbitrage Looks Like

Test

True Arbitrage (what I ran)

Cash‑Futures “Arb” Fund

Trade example

Buy Reliance on BSE, sell on NSE ‑‑ OR lock in some form of put-call-parity violation

Buy Reliance cash, short Reliance 1‑M fut

Source of P&L

Law‑of‑one‑price violation (structural mis‑pricing/dislocations possibly sparked by fat orders)

Cost‑of‑carry (interest‑dividend)

Convergence speed

Seconds in 2009 … micros now … nanoseconds on FPGA

30‑45 days (expiry)

Capital at risk

After hedge ≈ zero (just slippage)

Margin + inventory + funding cost

Residual risks

Operational stupidities/errors like KCG

Credit, liquidity, redemption shock

If your P&L trickles in over a month, you’re harvesting carry, not arbitrage.

3. What These Funds Actually Hold

  1. ​65‑70 % Cash‑Futures Carry
    1. Long cash, short fut, harvest the basis.
  2. 30‑35 % Short‑Duration Debt
    1. Repos, CPs, bank CDs, NCDs - juice the yield, pledge for margin, add credit tail‑risk.

In 2018 DHFL paper was stamped AAA right up until it detonated and carved ~5 % out of some “arbitrage” NAVs. Rating doesn’t immunise you.

4. The Marketing Alchemy

  • Tax optics - Clear 65 % equity exposure, claim equity LTCG @ 12.5 %.
  • Sales psychology - “Arbitrage” sounds brainy and “risk‑free.” “Carry trade with bond sleeve” on a pdf brochure just doesn’t hit the same chord. At least stat‑arb and risk‑arb desks tag their trades honestly (yes, I’ve done both); their comp rides on P&L, not just AUM (2 and 20 anyone?).
  • Legacy inertia - Name stuck in 2006? I dunno, GPT gave me this point.

5. Desk vs Fund - Apples and Rocketships


My Inter‑Exchange Stock Arb

Cash‑Futures Carry Fund

Hold period

nano‑seconds → minutes → days (if you can warehouse your locked arb)

30‑45 days

Tech stack

Colo + FPGA + cross‑connect

Excel + OMS

Tail risk

KCG! READ ABOUT IT!

Bond default, mass redemption

Same word, different galaxy.

6. Investor Checklist (Read This, Then Decide)

  1. See through the label. You’re buying carry + credit, not instantaneous arb.
  2. Probe the debt sleeve. Ask for exact weight in sub‑AAA, but remember: even “AAA” can default (DHFL says namaste).
  3. Watch spread compression. RBI cuts → basis shrinks → yield drops.
  4. Size appropriately. I park ~10 % of my MF pile here - my cash bucket - accepting a potential 3‑5 % drawdown.
  5. Party small‑talk guidance. If you call it risk‑free arbitrage, quants will mock you behind your back and you’ll mislead the novices. (To be fair, at most parties the only question I get is “NIFTY teji mein hai ya mandi mein?” - same energy as me cornering a doctor to review my blood-test PDF.)

7. Rename Proposal

  • Carry & Credit Fund (Equity‑Oriented) – dull but honest.

  • Basis‑Capture & Short‑Debt Fund – never getting past marketing.

Until SEBI re‑badges them, the misnomer stays. Just know what’s under the hood.

8. Final Word

Cash‑and‑carry funds are handy, tax‑efficient, low‑vol parking lots. 
But they’re a carry trade tied to a bond sleeve, not the arbitrage I grew up on.