Arbitrage funds vs liquid funds in India is a key choice for low-risk investors. Both offer stability, but their strategies and outcomes differ. Which suits your goals? Let’s break it down.
Arbitrage Funds and Liquid Funds:
Arbitrage funds capitalize on price discrepancies between the cash and futures markets. Fund managers simultaneously buy in the spot market and sell in the futures market, profiting from the difference. These funds are considered equity-oriented and are suitable for investors seeking short-term gains with minimal market risk.
Liquid funds invest in short-term debt instruments like treasury bills, commercial papers, and certificates of deposit. They are ideal for parking surplus funds for a few days to a few weeks, offering safety and liquidity. However, their returns are influenced by interest rates and credit risks associated with the underlying instruments.
Key Differences Explained:
Returns and Tax Efficiency:
- Returns Comparison: Arbitrage funds have recently outperformed liquid funds. For instance, in the past year, an average arbitrage fund delivered 7.33% returns, whereas liquid funds yielded 7.07%. Notably, 18 out of 25 arbitrage funds provided returns exceeding 8%.
- Tax Implications: Arbitrage funds are treated as equity-oriented funds for tax purposes. STCG are taxed at 15%, and LTCG exceeding ₹1 lakh are taxed at 10%. In contrast, liquid funds are taxed according to the investor’s income tax slab, which can be as high as 30% for individuals in the highest tax bracket.
Liquidity and Exit Charges:
- Liquidity: Liquid funds offer high liquidity, with redemption processed within 24 working hours. Arbitrage funds, however, may take 3 to 5 working days for redemption.
- Exit Charges: Liquid funds typically do not impose exit loads. Arbitrage funds may charge an exit load of 0.25% to 0.5% if redeemed within the first 3 to 6 months.
Risk, Costs, and Liquidity:
Arbitrage funds vs liquid funds in India differ in risk. Arbitrage funds carry low market risk but depend on price gaps, which can shrink. Liquid funds face minimal credit risk with AAA-rated securities but slight interest rate sensitivity. Expense ratios are higher for arbitrage (0.7-1%) than liquid funds (0.1-0.3%), per DSP. Both offer high liquidity, with liquid funds slightly faster. Moreover, arbitrage funds need a demat for direct trading, unlike liquid funds.
Which Should You Choose?
- Arbitrage Funds: Suitable for investors in higher tax brackets (20% or 30%) seeking better post-tax returns. They offer higher returns and tax efficiency compared to liquid funds. However, they require a minimum investment horizon of 3 months and come with a slight exit load if redeemed early.
- Liquid Funds: Ideal for investors in lower tax brackets or those needing immediate liquidity. They provide quick access to funds and are less sensitive to market volatility. However, their post-tax returns may be lower due to higher taxation.
Conclusion:
Arbitrage funds and liquid funds cater to different investor needs. Liquid funds suit those seeking safety and quick access, while arbitrage funds offer better tax efficiency and higher return potential for moderate risk-takers. Choose based on your goals, risk appetite, and investment horizon. Ready to invest? Explore more fund insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Arbitrage Funds vs Liquid Funds here – https://groww.in/arbitrage-liquid