Is Arbitrage Fund risk-free?

Arbitrage funds are low-risk but not risk-free. They do not take directional market bets (hedged), but they may carry limited credit and liquidity risk due to short-term debt instruments held for margin requirements.

Is Arbitrage Fund better than FD for 1 year?

Yes, especially if you are in the 30% tax bracket. Returns are taxed at 20% (STCG) for arbitrage funds vs 30% slab rate for FDs. For holdings > 1 year, the tax drops to 12.5% (LTCG).

Are returns guaranteed in Arbitrage Funds?

No. Unlike FDs, returns are market-linked. However, due to the nature of arbitrage (spot-futures spread), they typically deliver stable returns comparable to Liquid Funds (6.5% - 7.5%).

Arbitrage Fund vs FD: The Tax-Efficient Alternative Smart Investors Use

Arbitrage Funds vs FDs: While Fixed Deposits offer guaranteed returns, they are taxed at your slab rate (up to 30%). Arbitrage Funds offer similar low-risk returns but are taxed as Equity (12.5% LTCG), making them far superior for post-tax income.

Tax rules mentioned are as per current Indian income tax laws applicable from FY 2024–25. Always consult latest regulations.

Fixed Deposits (FDs) are the "comfort food" of investing. They are safe, simple, and guaranteed. But for high-income earners, they come with a massive hidden cost: Taxation.

If you are in the 30% tax bracket, earning 7% on an FD means you actually only keep 4.9%. That barely beats inflation! Meet the smarter alternative: the Arbitrage Fund.

1. The Problem with FDs (It's Not Returns)

The problem isn't the interest rate; it's how the government treats that interest. FD interest is added to your total income and taxed at your slab rate.

Nominal Return: 7.00%
Tax (30% Bracket): 2.10%
Net Return in Pocket: 4.90%

You are essentially parking money, not growing it.

2. What is an Arbitrage Fund? (How it Works)

Arbitrage funds are Mutual Funds that profit from the price difference between the Cash Market and the Futures Market. It sounds complex, but it's actually a low-risk, market-neutral strategy based on price differences.

The "Pen" Analogy:

Imagine you buy a pen in Market A for ₹10.
At the exact same second, you find a buyer in Market B willing to pay ₹10.50 for it next month.
You lock in that deal instantly.
Your profit of ₹0.50 is guaranteed. It doesn't matter if the price of pens crashes to ₹5 or zooms to ₹20. You have already locked your profit.

Because they are fully hedged, they have extremely low risk, comparable to Debt funds. But here is the magic: The government treats them as Equity Funds for tax purposes.

Note: Arbitrage funds are not capital-guaranteed like bank FDs, but their market risk is significantly lower due to fully hedged positions.

3. The Tax Battle: 30% vs 12.5%

This is where Arbitrage funds shine. Since they invest >65% in equity derivatives, the taxman treats them like stock investments.

Period	Fixed Deposit (FD) Tax	Arbitrage Fund Tax
Short Term (< 1 Year)	Slab Rate (Up to 30%)	20% (STCG)
Long Term (> 1 Year)	Slab Rate (Up to 30%)	12.5% (LTCG) *First ₹1.25L profit is Tax-Free

Check Your Tax Savings

Use our tax calculator to compare the liability on FD interest vs Mutual Fund gains.

Calculate Tax Difference

4. Real Life Example: ₹10 Lakh Investment

Let's compare investing ₹10 Lakhs for 1 Year for an investor in the 30% tax bracket.

Parameter	Fixed Deposit	Arbitrage Fund
Pre-Tax Return	7.0% (₹70,000)	7.0% (₹70,000)
Tax Rate	30% + Cess	20% (Short Term)
Tax Amount	₹21,840	₹14,000
Net Profit	₹48,160	₹56,000
Extra Gain	-	+ ₹7,840

Conclusion: Even with identical pre-tax returns, the Arbitrage Fund put ₹7,840 more in your pocket simply due to tax efficiency.

5. Who Should Choose What?

Choose Fixed Deposit (FD) If:

You need the money in less than 3-6 months.
You are in the 0% or 10% tax bracket (FDs are fine here).
You want 100% capital guarantee (up to ₹5L via DICGC).

Choose Arbitrage Fund If:

You are in the 20% or 30% tax bracket.
Your investment horizon is 6 months to 3 years.
You want better post-tax returns without taking stock market risk.

Avoid Arbitrage Funds If:

You need the money within a few days (Exit loads often apply for <15-30 days).
You cannot tolerate slight daily NAV fluctuations (volatility is low, but present).

Also consider the impact of inflation on post-tax returns. Use our Inflation Calculator to see whether your FD or Arbitrage Fund is actually growing your wealth.