Your arbitrage fund returns will fall by about 0.5% next year due to this increased STT: Deepak Shenoy

Deepak Shenoy, CEO, Capitalmind Asset Management said that the recent increase in Securities Transaction Tax (STT) will directly impact arbitrage mutual funds, leading to a reduction in investor returns of around 0.5% over the next year.

He points out that arbitrage funds are the biggest participants in the futures market, and since their strategies depend on thin margins and low-cost execution, even a small rise in transaction costs can materially affect performance.

Shenoy posted on a social media platform X (formely known as Twitter) that, “The STT increase is not of major impact to retail players. The biggest players in futures are arbitrage funds. Your arbitrage fund returns will fall by about 0.5% next year due to this increased STT. Also FPIs, who buy stocks in futures because the impact cost is lower than in the cash markets. Then they let them expire and convert to stock. This has a higher cost, 4 basis points higher in the futures markets. Remaining STT is the same for the most part.”



Also Read | Union Budget 2026: FM plans FEMA overhaul, introduces total return swaps for corporate bonds

Arbitrage funds typically exploit price differences between the cash and futures markets to generate low risk returns. They operate on thin margins and depend on cost efficiency to deliver stable returns.

Shenoy has also clarified that the STT increase is not a major concern for retail investors. For individual market participants, transaction costs form only a small part of long-term investment outcomes. As a result, the tax hike does not materially change retail trading or investing behaviour.

He also highlighted the impact on foreign portfolio investors (FPIs) as they buy stocks through futures contracts because the impact cost, including market slippage and liquidity cost, is often lower than in the cash market. These positions are then allowed to expire, converting futures exposure into stock holdings.

This has a higher cost, 4 basis points higher in the futures markets. Despite the changes, Shenoy notes that most other components of STT remain the same. This means the broader market structure, trading framework, and overall market functioning are not disrupted.

Also Read | Union Budget 2026: India raises overseas individual investment limits in equities under PIS

Adding to this, Atul Shinghal, Founder and CEO, Scripbox, said the 150% STT hike on the futures leg of the trade narrows arbitrage opportunities. Net returns for these funds could drop by an annualised 0.20% to 0.40%, diminishing their appeal as a low risk, short term money parking alternative.