If there is one saying that holds true to investing, it is that there is more than one way to skin a cat. There really is no single way to reach your financial goals, and you can adopt any investment strategy or asset that aligns with your financial needs, risk appetite, and goals. With different mutual fund schemes emerging in the market every day, identifying the one that works for you can be tricky. In this article, we will take over the debate of arbitrage funds vs liquid funds and highlight the features of both schemes to help you make informed investment decisions.
What are arbitrage funds?
Arbitrage refers to the simultaneous purchase and sale of an asset in different markets to benefit from the price difference in other markets. For instance, consider buying an asset for Rs 10 in Market X and selling the same for Rs 15 in Market Y.
Arbitrage funds purchase stocks in the cash market and simultaneously sell them in the futures market at a higher price. This helps the fund generate profits. As per the Securities and Exchange Board of India (SEBI), arbitrage funds are categorised as hybrid funds that invest at least 65% of their assets in equities and equity-related securities which undertake arbitrage opportunities.
Let’s now move to liquid funds.
What are liquid funds?
Liquid funds invest in money market instruments and debt securities that have residual maturities of up to 91 days. These funds invest in Certificates of Deposits (CDs), Treasury Bills (T-bills), Commercial Papers (CP), etc. As per SEBI, liquid funds are categorised as debt funds.
It is time get to the differences between liquid and arbitrage funds.
Arbitrage funds vs liquid funds
Features | Arbitrage funds | Liquid funds |
Type | Hybrid funds | Debt funds |
Liquidity | These funds are highly liquid but may be relatively less liquid than liquid funds as it may take a few days to receive your money. | Liquid funds are highly liquid as they process redemptions within one working (T+1) day. |
Risk | Arbitrage funds are 100% hedged with almost no price fluctuation risk. | Liquid funds are low-risk, but they may carry credit and interest rate risk. |
Expense ratios | Arbitrage funds may have comparatively higher expense ratios as they dynamically buy and sell in different markets. This may increase fund management expenses and transaction costs. | Liquid funds simply invest in short-term securities and hence may have relatively lower expense ratios and transaction costs. |
Tax | Arbitrage funds are classified as equity funds for tax purposes. Long-term gains from these funds held for more than a year are taxed at 10%. However, gains up to Rs 1 lakh are tax-exempt in a financial year. Short-term capital gains from these funds held for less than a year are taxed at 15%.
| Since liquid funds are debt funds, the gains from them are added to your taxable income for the financial year and taxed as per the tax slab applicable on your overall earnings for the year. |
Conclusion
Both arbitrage funds and liquid funds have unique features that may cater to different financial goals. It is essential to understand your investment purpose and research well before making any investment decisions. Consulting a financial advisor can also help in understanding the role of each of these funds in your financial objectives and investment plan.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
