Guess which funds have got Rs 43,000 crore in last 90 days?

Summary: A low-risk, tax-efficient mutual fund category has quietly become the most popular destination for short-term money. So, why are investors — especially high-income ones — pouring money into it? And does it make sense for you? Find out inside.

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The unlikely hero is arbitrage funds.

• This fund category received net inflows of Rs 15,584 crore in June 2025 alone, as per the latest AMFI (Association of Mutual Funds in India) data.
• What’s more, since April, these funds received net investments of over Rs 43,000 crore, a staggering number for a fund type once seen as boring or niche.
• The staggering numbers don’t stop here. These funds have accounted for nearly 75 per cent of the entire hybrid category's inflows, which includes far flashier peers like aggressive hybrid funds and balanced advantage funds.

Which means if hybrid funds were the stock market, arbitrage funds would be the Nvidia of the segment.

But what are arbitrage funds?

Arbitrage funds aim to generate low-risk returns by exploiting price differences in the cash and futures segments of the equity market. In simple terms, they buy a stock in the cash market and simultaneously sell it in the futures market at a slightly higher price.

Say, Reliance is trading at Rs 2,500 in the cash market and Rs 2,520 in the futures market.
The arbitrage fund buys in cash, sells in futures and locks in a Rs 20 profit, without taking on stock price risk.

In recent times, arbitrage funds have surged in popularity as a smart place to park short-term money. They are now actively vying with liquid funds for the title of investors’ most preferred short-term investment vehicle.

That said, let’s be clear: arbitrage funds aren’t long-term wealth builders. With their typically single-digit returns, they’re best viewed through a short-term lens, which is why, in the rest of this piece, we’ll focus only on their suitability for holding periods of three to twelve months.

Why are arbitrage funds gaining in popularity?

1. Tax advantage over debt funds

Until recently, debt mutual funds enjoyed the benefit of indexation, which significantly reduced your long-term capital gains tax. But with that benefit scrapped, many high-income investors have started parking their short-term surplus in arbitrage funds instead.

Why? Because of the favourable tax treatment arbitrage funds enjoy. Let’s break it down with a simple example:

Suppose you invested Rs 2 lakh in April 2017, and by 2023, your investment grew to Rs 3 lakh — a gain of Rs 1 lakh. Without indexation (post-2023 rules for debt funds), the entire Rs 1 lakh gain would be added to your income and taxed at your slab rate. If you're in the 30 per cent bracket, that’s Rs 30,000 in tax.

However, arbitrage funds offer debt-like risk but are taxed like equity.

• Short-term capital gains (less than 1 year) are taxed at 20 per cent
• Long-term capital gains (over 1 year) are taxed at 12.5 per cent, and only on gains exceeding Rs 1.25 lakh annually

No wonder, arbitrage funds have become the go-to option for short-term parking, especially for those looking to optimise post-tax returns.

2. Better returns

Arbitrage funds are no longer just a safe parking lot, they are holding their own on returns too.

Sure, liquid funds currently have a slight edge in raw performance — averaging 6.85 per cent over the past year compared to 6.68 per cent for arbitrage funds. Over a three-month period too, liquid funds clocked 1.5 per cent, just ahead of arbitrage funds’ 1.49 per cent.

But that’s only half the story.

Once you factor in taxes — especially if you fall in the highest tax slab — arbitrage funds can actually deliver better post-tax returns.

Take this simple example. Suppose you invest Rs 1 lakh for a year.

• In a liquid fund earning 6.85 per cent, your gain is Rs 6,850. But this is taxed as per your slab — so if you’re in the 30 per cent bracket, you lose Rs 2,055 in tax. Your post-tax return? Just Rs 4,795.
• Now consider an arbitrage fund with a return of 6.68 per cent. Your gain here is Rs 6,680. But because arbitrage funds are taxed like equity, you only pay 15 per cent on short-term gains — or Rs 1,336. That leaves you with Rs 5,344 in hand.

So, despite having a slightly lower pre-tax return, arbitrage funds outperform liquid funds after tax by Rs 549 on a Rs 1 lakh investment over one year. Scale that up to Rs 10 lakh, and you’re looking at an extra Rs 5,490 in your pocket — without any additional risk.

Should you invest in arbitrage funds?

Arbitrage funds can be a smart choice if your investment horizon is between 3 to 12 months and if you fall in the highest tax bracket (30 per cent). Their favourable tax treatment makes them more efficient for high-income investors over short-term periods.

However, if you’re in the 20 per cent tax bracket or lower, liquid funds often deliver better post-tax returns, making them the more suitable default option for conservative investors.

Also, liquid funds tend to be more stable. Arbitrage fund returns, while relatively safe, can fluctuate a bit due to changes in arbitrage spreads — the difference between cash and futures prices — which can narrow in volatile markets and impact short-term returns.

So, if you are looking for the best arbitrage or liquid fund for your goals, we recommend you explore our top-rated recommendations and insights on Value Research Fund Advisor — where we help you choose the right fund, tailored to your time horizon and risk appetite.

Also read: The one mutual fund every new investor should invest in