Arbitrage Funds vs Fixed Deposits in India: Which is Better?
This article highlights the main differences between arbitrage funds and fixed deposits in India to help investors make the best choice for their financial needs.
Arbitrage Funds vs Fixed Deposits in India: Which is Better?
Posted on 26 May 2024 • Updated on: 05 Dec 2024
Author: Sayan Sircar
5 mins read
📢Join 3500+ readers on WhatsApp and get new post notifications!
This article highlights the main differences between arbitrage funds and fixed deposits in India to help investors make the best choice for their financial needs.
Originally published: 26-May-2024
Updated: 05-Dec-2024 - taxation updated as per Budget 2024
This article is a part of our detailed article series on the concept of hybrid mutual funds in India. Ensure you have read the other parts here:
-
Should you invest in hybrid funds via SIP for short-term goals?
This article shows you how different categories of hybrid funds have performed for regular SIP investments for short durations.
-
Aggressive hybrid mutual funds: understanding the what, why, when and who
This article discusses mutual funds belonging to the aggressive hybrid category for investors to understand if they should invest in such funds.
-
A primer on hybrid mutual funds: what are they and when to invest in them
This article talks about the hybrid mutual fund category in India and shows you which ones to invest in as per your goals.
📚 Topics covered:
- What are Arbitrage Funds?
- How do Fixed Deposits Differ from Arbitrage Funds?
- How are Arbitrage Funds Better than FDs?
- How are FDs Better than Arbitrage Funds?
We have discussed this topic in general before: Mutual Fund vs Fixed Deposit - where should you invest?
What are Arbitrage Funds?
Arbitrage funds are hybrid mutual funds that capitalize on price differences between equity cash and futures markets.
These funds are taxed like equities (12.5% tax on long-term capital gains over ₹1.25 lakhs), making them attractive for short-term investment. Investors should note:
- Short-term gains may vary significantly based on available arbitrage opportunities. It’s wise to assess this before investing.
- SEBI mandates up to 35% of the fund’s portfolio can be in debt instruments, which requires the usual debt fund due diligence.
- Like all mutual funds, returns are not guaranteed, and there is a risk of not recovering the full investment.
- You can invest regularly in SIP form. FDs have recurring deposit but there is lesser amount of flexibility
How do Fixed Deposits Differ from Arbitrage Funds?
Fixed deposits (FDs), unlike mutual funds:
- Guarantee the return of the principal and the predetermined interest.
- Provide exact figures for what you’ll receive at maturity.
- Clearly state the date on which you will receive your money.
Related:
What is Deposit Insurance and How Does it Protect Your Money?
To understand whether arbitrage funds are better than FDs for you:
How are Arbitrage Funds Better than FDs?
Arbitrage funds offer several advantages over fixed deposits:
- There is no fixed maturity date. You can invest your money and withdraw it when needed.
- Taxes on capital gains are due only upon sale, whereas FDs are taxed annually and upon maturity.
- Capital gains tax is lower (12.5% for holdings over one year; 20% for shorter periods) compared to your income tax slab, which could be as high as 30% or more.
- You can withdraw your investment anytime after 30 days without penalties.
- Arbitrage funds do not require choosing an investment duration, as FD interest rates vary based on the term length.
Arbitrage funds are suitable if you are in a high tax bracket, can manage variable returns, and prefer flexibility in building a short-term fund over guaranteed principal safety.
How are FDs Better than Arbitrage Funds?
FDs offer distinct benefits that arbitrage funds lack:
- They provide fixed and guaranteed returns of both principal and interest.
- They offer a sense of security as all banks are considered safe, especially SIFI banks (e.g., SBI, HDFC, ICICI).
- Early withdrawal of FDs results in a loss of interest: Should you break your FD and create a new one at new higher rates?
- Most FDs allow for online termination, unlike mutual funds which typically require at least one business day to process withdrawals.
- FDs, especially sweep FDs, are ideal for accessing funds during emergencies.
FDs are preferred by those who prioritize safety over returns, are in lower tax brackets, and can synchronize their cash flow needs with FD maturity dates.
Related Articles
- A primer on hybrid mutual funds: what are they and when to invest in them
- What should debt, international and gold mutual fund investors do now that these funds are taxable at slab rate?
- Aggressive hybrid mutual funds: understanding the what, why, when and who
What's next? You can join the Arthgyaan WhatsApp community
You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.For resident Indians 🇮🇳:
For NRIs 🇺🇸🇬🇧🇪🇺🇦🇺🇦🇪🇸🇬:
Share on WhatsApp: To understand how this article can help you:
If you have a comment or question about this article
The following button will open a form with the link of this page populated for context:If you liked this article, please leave us a rating
The following button will take you to Trustpilot:Discover an article from the archives
Previous and next articles:
Latest articles:
Topics you will like:
Next steps:
1. Email me with any questions.
2. Use our goal-based investing template to prepare a financial plan for yourself.Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.
Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.
More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
This post titled Arbitrage Funds vs Fixed Deposits in India: Which is Better? first appeared on 26 May 2024 at https://arthgyaan.com
We are currently at 503 posts and growing fast. Search this site: Copyright © 2021-2024 Arthgyaan.com. All rights reserved.