STT impact: Arbitrage fund returns could drop 30 basis points, says Edelweiss MF

The recent increase in securities transaction tax (STT), announced by the Finance Minister Nirmala Sitharaman in the Union Budget 2026, is expected to reduce returns from arbitrage funds by around 25-30 basis points (bps), according to Bhavesh Jain of Edelweiss Mutual Fund.Jain said arbitrage funds currently deploy around 70–75% of their assets in arbitrage trades that are rolled over monthly. He said, “The cost will be up by three bps.” He added that after including rollover and portfolio churn costs, the overall impact on returns could be higher.

He said, “The impact should be around 30 to 32 bps.” The revised STT rates will be effective from April 1, and Jain said the impact will start reflecting in returns after that.
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He said arbitrage funds may try to recover part of the increased cost by seeking better rollover spreads. However, he said some impact on returns is unavoidable.Jain said arbitrage funds may still remain more tax-efficient compared to liquid funds. He said the post-tax return gap between arbitrage funds and liquid funds may narrow but will remain in favour of arbitrage funds.

He added that there will be no immediate impact before April as most positions have already been rolled over. He said the STT increase may also impact other hybrid products such as balanced advantage funds, equity savings funds and hybrid long-short funds, though the impact may be smaller.

Jain also said arbitrage funds cannot shift trades to options as regulations require them to use single stock futures for arbitrage strategies.

For the full interview, watch the accompanying video

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