THE MARKET REGULATOR’S closing auction session (CAS) has created temporary price dislocations near market close, increasing mark-to-market volatility in arbitrage funds. For investors, this may mean slightly higher short-term net asset value (NAV) fluctuations, but not necessarily higher underlying risk.
The temporary NAV impact from CAS is unlikely to materially change the long-term return potential of arbitrage funds, as pricing anomalies generally get corrected. The effect should largely even out over multiple arbitrage cycles. Thus, you should not react to the temporary volatility or change allocations based on CAS.
“Arbitrage remains primarily a low-risk, market-neutral strategy, so focus on post-tax returns, spreads and fund consistency,” says Aditya Agarwal, chief investment officer, Avisa Wealth Creators.
Fund managers say there is no need for investors to increase the holding period because of CAS. However, those with a short-term horizon may benefit from staying invested long enough to avoid exiting during temporary NAV fluctuations.
Why arbitrage funds were impacted by CAS
Arbitrage funds are among the strategies most directly affected by the new market structure. In these, the fund managers simultaneously buy shares in the cash market and sell the futures contract on the same stock at a slightly higher price. The difference in the cost and selling price is the return that investors get.
In the earlier framework, cash and futures markets were open until 3.30 pm, allowing arbitrage positions to be established or unwound simultaneously. With CAS, cash market trading in F&O stocks concludes at 3:15 pm and shifts to an auction mechanism, while futures continue trading until the market closes.
This creates a temporary period where futures continue to react to market expectations while the cash market awaits auction-based price discovery. The wider spot-futures spread resulted in higher mark-to-market gains on Day 1 of CAS (August 3, 2026).
“As auction volumes and participation improve, the impact of CAS on day-to-day NAV movements is expected to reduce, while the underlying arbitrage spreads continue to be realised at expiry,” a note from Tata Mutual Fund says.
Stagger investments
Shashank Udupa, founder, Vayu Capital, says buyers on day one of CAS got units at inflated NAVs and those who redeemed banked the distortion. “Over three to six months this is unlikely to be material. Over a single transaction, it is.”
If you are a new investor, stagger your bets in arbitrage funds. It will help reduce timing risk, particularly when NAV volatility is elevated. “If you spread your investment over three or four tranches across a few weeks-and ideally avoid the days right around expiry-you end up averaging out both the clean and distorted NAVs,” says Sonam Srivastava, founder, Wright Research PMS.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Investors should assess their financial goals, risk appetite and consult a qualified financial advisor before making investment decisions.
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