One of the key drivers behind this surge is the tax efficiency of arbitrage funds.
Value Research notes that short-term capital gains on these funds are taxed at 15%, while long-term gains above ₹1 lakh attract 10%. In contrast, other short-term debt options like liquid funds are taxed as per the investor’s income slab.
This tax arbitrage makes them more attractive, especially for high-income investors looking for short-term investment options.
Bullish markets widen spread opportunities
Arbitrage funds profit by exploiting price differences between the cash and futures markets. In bullish markets, these spreads tend to widen, creating more opportunities for arbitrage.
The current market conditions have made such trades more profitable, further increasing investor interest, according to Value Research.
Safer alternative in uncertain times
While arbitrage funds invest in equities, they do so with minimal directional risk. Value Research points out that these funds are designed to deliver fixed-income-like returns with lower volatility.
This makes them a preferred option for risk-averse investors looking for stability amid market fluctuations.
Performance close to liquid funds
Over the past year, arbitrage funds delivered an average return of 6.71%, slightly lower than the 6.93% delivered by liquid funds. However, despite marginally lower returns, arbitrage funds saw strong inflows in May while liquid funds witnessed net outflows of ₹40,205 crore, as per Value Research data.
₹50,000 crore added in FY25
The popularity of arbitrage funds is not limited to May. Value Research highlights that these funds have attracted over ₹50,000 crore in net inflows so far in FY25, indicating a sustained investor preference for this category.
First Published: Jun 17, 2025 3:13 PM IST