What are Factors Behind Surge in Arbitrage Mutual Fund Inflows in May 2025?

Arbitrage funds emerged as the top-performing category in terms of net inflows across all mutual fund segments in May 2025, attracting ₹15,702 crore, according to data from Value Research. This figure significantly surpasses the inflows into small-cap funds (₹3,214 crore) and multi-cap funds (₹2,999 crore), underlining a notable shift in investor preference.

Tax Efficiency: A Major Pull Factor

A key factor behind this surge is the favourable tax treatment arbitrage funds enjoy. Value Research points out that short-term capital gains on these funds are taxed at just 15%, while long-term gains above ₹1 lakh are taxed at 10%. In comparison, short-term debt instruments such as liquid funds are taxed according to the investor’s income bracket, which can be as high as 30%.

This tax advantage makes arbitrage funds particularly appealing to high-net-worth individuals and investors in higher tax slabs who are seeking short-term, tax-efficient investment avenues.

Bullish Market Trends Boost Arbitrage Opportunities

The rising equity markets have also contributed to the growing appeal of arbitrage funds. These funds generate returns by capitalising on the price differential between spot and futures markets. In bullish conditions, the spread between these markets tends to widen, creating more opportunities for profitable trades. According to Value Research, this has enhanced the return potential of arbitrage strategies in recent months.

A Safer Bet Amid Volatility

While arbitrage funds invest in equities, they carry minimal directional market risk, making them a conservative choice relative to pure equity funds. Value Research highlights that their return profile is similar to fixed-income instruments but with lower volatility, making them a preferred option for risk-averse investors seeking stability in uncertain times.

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Comparable Returns, Stronger Inflows

Despite delivering a slightly lower average return of 6.71% over the past year compared to 6.93% from liquid funds, arbitrage funds continued to gain investor traction. Notably, liquid funds saw net outflows of ₹40,205 crore in May, while arbitrage funds recorded strong inflows, suggesting a shift in investor sentiment.

Over ₹50,000 Crore Mobilised in FY25 So Far

Investor interest in arbitrage funds extends beyond May. Cumulative net inflows into this category have already crossed ₹50,000 crore in FY25, reflecting sustained momentum and growing confidence in the fund’s ability to deliver tax-efficient, low-risk returns in a dynamic market environment.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

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