Arbitrage funds staged a sharp recovery in the first quarter of FY27, attracting net inflows of Rs 23,875 crore after recording net outflows of Rs 17,229 crore in the January-March quarter of FY26.
The weak showing in Q4FY26 was largely due to massive net outflows of Rs 21,113 crore in March 2026—nearly 10 times the Rs 2,855 crore redeemed in March 2025. Inflows rebounded strongly in April and remained steady through May and June.
Ashok Kanawala, head of distribution alliances and product strategy at HDFC AMC, said heavy redemptions from arbitrage schemes in March are a seasonal phenomenon as investors withdraw money to meet advance tax obligations. This year, however, the trend was amplified by cumulative corporate redemptions across liquid, money market, arbitrage and other short-duration debt schemes.
Alok Singh, chief investment officer at Bank of India Mutual Fund, said flows into arbitrage funds are a barometer of institutional liquidity and risk appetite. The strong inflows in Q1FY27 suggest that corporate treasuries preferred relatively low-risk, tax-efficient avenues over equity schemes amid elevated market uncertainty.
Singh also attributed the sharp March outflows primarily to tax-related redemptions, adding that some investors may have also withdrawn funds to take advantage of the correction in equity markets triggered by the West Asia conflict.
The category also came under focus after the Union Budget 2026 increased the securities transaction tax (STT) on futures trades from 0.02 per cent to 0.05 per cent.
According to Singh, while the higher STT has marginally reduced arbitrage fund returns, these schemes continue to enjoy equity-like taxation, making them more attractive to institutional investors than liquid funds, which may offer slightly higher returns but are taxed at the investor’s marginal income tax rate.
Kanawala said the impact of the STT hike on arbitrage fund returns is expected to be modest. Their tax efficiency continues to underpin investor interest, as reflected in net inflows of more than Rs 23,800 crore during the April-June quarter despite the higher levy.
| Period | Arbitrage Inflows (in Rs crore) |
| Q1FY26 | 43,077 |
| Q2FY26 | 12,974 |
| Q3FY26 | 11,238 |
| Q4FY26 | -17,229 |
| Q1FY27 | 23,875 |
