Arbitrage funds gain momentum amid market volatility; inflows surge to ₹43,077 cr in Q1FY26

As the equity markets continue to remain volatile due to a mix of global and domestic uncertainties, arbitrage funds are witnessing renewed interest among investors seeking low-risk and tax-efficient investment options. These funds, which capitalise on price differentials between the cash and futures markets, seek to perform better in turbulent conditions, giving fund managers greater scope for intra-month trading opportunities, according to Tata Asset Management.

An arbitrage fund simultaneously buys a stock in the cash (spot) market, such as on the NSE or BSE, and sells a futures contract for the same stock, typically at a premium to the spot price. As of June 30, 2025, the total assets under management (AUM) of arbitrage funds stood at approximately ₹2.85 lakh crore. These funds have delivered a year-to-date (YTD) return of around 4% as compared to over 6% by Nifty50 index during the same period.

“In the current environment, arbitrage funds are uniquely positioned to capture the potential benefits of market volatility while shielding investors from direct equity risks,” said Sailesh Jain, Fund Manager at Tata Asset Management. “Elevated roll spreads and sustained volatility have enabled arbitrage funds to deliver reasonable returns, even as traditional income avenues have become less attractive.”

For investors seeking equity tax returns, arbitrage funds offer a suitable proposition, he said.

According to data from the Association of Mutual Funds in India (AMFI), arbitrage funds attracted ₹43,077 crore between April and June 2025, surpassing inflows into other hybrid and hybrid equity categories. In comparison, cumulative inflows into the broader hybrid fund category stood at just ₹1,530 crore, while equity savings funds received ₹1,500.5 crore during the same period. This surge highlights investor preference for instruments that aim to provide relatively stable returns while minimising equity risk.

Reflecting the broader industry trend, the Tata Arbitrage Fund saw inflows of ₹5,217 crore between April and June 2025, with ₹761 crore coming from New Delhi. The fund’s assets under management (AUM) stood at ₹14,274 crore as of June 30, 2025.

The current macroeconomic environment is especially conducive to arbitrage strategies, Tata Asset Management said in a note. Elevated market volatility and strong roll spreads have created profitable opportunities for fund managers. The Reserve Bank of India’s recent rate easing, including a 50-basis point cut in the repo rate and a 100-basis point reduction in the cash reserve ratio (CRR), has further enhanced the appeal of arbitrage funds over traditional fixed-income options.

“As global and domestic uncertainties continue to cloud the market outlook, arbitrage funds are a choice for investors to help them navigate choppy waters. With interest rates on a downward trend and savings account returns declining, traditional fixed-income options have become relatively less attractive in terms of returns,” says the note.

Adding to it, factors such as the anticipated Indo-U.S. trade deal, tariff negotiations, and ongoing geopolitical tensions are keeping the market volatility elevated.

Although the U.S. dollar index remains subdued for now, any spike in global risk aversion may trigger fresh market swings. In this backdrop, arbitrage funds seek to offer investors a low-risk way to capitalise on volatility without direct equity exposure.

Aside from lower risk, arbitrage funds enjoy tax advantages, as they are taxed like equity mutual funds. This gives them a clear edge over short-term debt instruments, especially for high-income investors looking to optimise post-tax returns.

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