Will Arbitrage Funds Lose Their Edge Now?

So far in 2025, the Nifty 50 has stayed largely in cruise control—moving within a band of 23,644 to 25,185 levels. With market volatility cooling in recent weeks, an important question arises: Could arbitrage funds—which thrive on price fluctuations—start losing their edge in this calmer environment?

- Dipti Sharma

Recent data suggests a strong link between volatility and fund flows. For instance, in May 2025, India's fear gauge—the India VIX—averaged a one-year high of 18.02, and arbitrage funds logged their highest monthly inflows in a year at ₹15,702 crore, according to Bloomberg and AMFI data.

In contrast, during September 2024, when volatility cooled to a 12-month low of 13.29 and the Nifty touched lifetime highs, arbitrage fund outflows of ₹3,532 crore were the highest in a year.

There may be short periods of low activity, like a sideways movement, also called consolidation zone, ahead of key events, but once it passes, things usually return to normal, explained market participants. While the recent dip in volatility may cause short-term impact on arbitrage fund returns, it's not likely to be significant or long-lasting.

There's another key factor to watch: interest rates. When rates fall, spreads in arbitrage positions tend to narrow, reducing potential returns to some extent, they added.