Arbuscular mycorrhizae (AM) exhibit the most positive obligate symbiotic relationship, with roots of majority of plants. They show higher ecological amplitude under adverse environmental conditions. The current study deals with the study of diversity of AM fungi during rainy season with respect to rhizosphere soil analysis for AM species composition and their subsequent role as bio-fertilizer. Spores of Glomus, Sclerocystis and Scutellospora were observed. The observed species were also detected in root colonization analysis, using standard staining methods. The spore density was highest for Glomus. It proved to be a dominant species. The application of bio-fertilizer product prepared with these dominant species was proved to be a potent bio-fertilizer in the field trials with chili crop.