Business
Arbitrage MF returns to face the squeeze with rise in STT
“We estimate returns from arbitrage funds to come down by 32 basis points annually due to higher STT on futures transactions,” says Niranjan Avasthi, senior vice president, Edelweiss Mutual Fund.
The category managed ₹2.78 lakh crore as of December 31, 2025, and saw net inflows of ₹72,318 crore over the past 12 months.
Arbitrage funds earn a spread by buying shares in the cash market and selling corresponding futures. Fund managers roll over stock futures every month, and with churning 10–20% of the book to capture new pricing gaps, result in frequent trades.
ET Bureau“Fund managers hold an average of 65-75% in arbitrage positions with the balance in fixed income. As the cost of sales of futures positions increases 3 basis points, the annual impact on returns can be 25-27 basis points,” says Deepak Gupta, fund manager, Invesco Mutual Fund.
“Rich investors are attracted to arbitrage for its tax efficiency. Many use the category to park money for short-term goals or to stagger their investments into equity,” says Gaurik Shah, senior vice president — Equity Investments, Mirae Asset Investment Managers (India).
Though the higher taxes on stock futures could squeeze returns, it is unlikely to erode its popularity primarily because of lower tax outgo. Gains are taxed as capital gains — at 20% if held for less than a year and 12.5% thereafter. By contrast, returns from deposits or debt funds are taxed at slab rates, which can reach 30% for high-income investors.
“Even after this, if both arbitrage and liquid earn 7%, the post-tax returns for one who pays 30% tax bracket in an arbitrage fund held for a year or more will be higher by 94 basis points than a liquid fund,” said Avasthi.
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