Short-term investments have long served as the backbone of liquidity planning for individuals and institutions. However, from April 2023, a quiet yet powerful shift has reshaped this space. Following changes in tax policy, investor preferences have gradually but firmly moved away from traditional liquid funds toward more tax-efficient alternatives like arbitrage funds. While both options offer low risk and decent liquidity, arbitrage funds are gaining ground as reflected in the AMFI data. This shift isn’t just about chasing returns- it’s about being smarter with idle cash in a new tax environment.
Surge in AUM – AUM in Arbitrage Funds surged nearly 200%, from ₹71,106 crore in Apr 2023 to ₹2,13,014 crore in Apr 2025. In contrast, Liquid Funds grew by just 40.7%, from ₹3,97,786 crore to ₹5,59,824 crore over the same period.
| Net AUM | Apr-23 | Apr-25 | % Change |
| Liquid Fund | 3,97,786 | 5,59,824 | 40.73 |
| Arbitrage Fund | 71,106 | 2,13,014 | 199.57 |
Source: AMFI; EduFund Research
Growth in Investor Folios – From April 2023 to April 2025, investor folios in Arbitrage Funds grew 38.1% (4.44L to 6.13L), while Liquid Funds saw only a 7.7% rise (17.75L to 19.12L), indicating a clear shift in investor preference toward Arbitrage Funds.
Fund flows – Net inflows in Arbitrage Funds jumped from ₹1,683 crore in FY19–20 to ₹90,846 crore in FY23–24, followed by ₹50,800 crore in FY24–25. In contrast, Liquid Funds saw outflows for four straight years, with inflows of ₹38,349 crore only in FY24–25, reflecting stronger investor confidence in Arbitrage Funds.
Source: AMFI; EduFund Research
Taxation: The Game Changer
Arbitrage funds are taxed as equity, with favorable rates for short- and long-term gains. In contrast, liquid funds are treated as debt and taxed at slab rates by default, regardless of the holding period. This tax advantage makes arbitrage funds more attractive than liquid funds. With their relatively stable short-term returns, arbitrage funds have emerged as a preferred choice for conservative, tax-conscious investors.
| Particulars | Liquid Funds | Arbitrage Funds |
|---|---|---|
| Treated As | Debt | Equity |
| Tax Treatment | STCG Only | STCG / LTCG |
| Holding Period for LTCG | — | 12 Months |
| Tax Rate – STCG | Slab Rate | 20% |
| Tax Rate – LTCG | Slab Rate | 12.50% |
Source: Finance Bill; EduFund Research
Conclusion
In conclusion, both liquid and arbitrage funds provide low-risk, liquid investment avenues. However, the tax efficiency of arbitrage funds -particularly for HNIs and those in higher tax brackets – makes them a smarter choice for short-term allocations. In today’s landscape, where every post-tax rupee counts, arbitrage funds are increasingly becoming the preferred vehicle for conservative, yet savvy investors.
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