Arbitrage funds losing momentum as regulatory costs bite.

Arbitrage funds losing momentum as regulatory costs bite. India's arbitrage fund collections plummeted 82 percent in February to 591 crore rupees from 3,293 crore the previous month, signaling weakening investor interest. The category faces dual headwinds: Securities Transaction Tax on futures sales increased from 2 basis points to 5 basis points, raising annual transaction costs by 40 to 45 basis points. Additionally, new regulatory directives mandate debt allocations only in government securities maturing within one year, restricting higher-yielding corporate debt exposure. These changes could compress returns by 50 basis points overall. Despite managing 2.73 lakh crore in assets, arbitrage funds recorded their highest inflows within hybrid categories over twelve months. However, expected returns may fall from current levels of 6.17 percent annually.