liquid-fundequitymutual-fund

Arbitrage funds vs liquid funds?

Which is better arbitrage fund or liquid fund?

Asked
Ankit

Arbitrage Funds buys shares in cash segment and sells futures in derivatives segment. It leverages the price differences in the 2 segments and generates returns for its investors.

Liquid Funds are debt mutual funds that invest money in short term market instruments like treasury bills, government securities, etc. These funds can invest in instruments with maturity of up to 91 days. Lower maturity periods help a fund manager in meeting the redemption demand from investors.

Key differences between these 2 funds are:

1.    Liquidity: Liquidity of liquid fund is far better than arbitrage fund. It takes 3 to 5 days to redeem an arbitrage fund in contrast liquid fund can be encashed within a day.

2.    Return on investment: Arbitrage fund provides slightly better return on investment when compared to liquid fund.

3.    Tax benefit: Arbitrage fund being a type of equity fund, are tax free on capital gain if held for more than 1 year. No such tax exemption on capital gain from liquid funds at maturity.

4.    Risk factor: Liquid funds are debt fund so are much safer option of investment as compared to arbitrage investment.

5.    Research: Extensive market research is needed in case of arbitrage fund. Arbitrage funds rely too much on fund houses as compared to liquid funds.

6.    Exit penalties: Liquid funds don’t have exit penalties, but arbitrage funds attract premature withdrawal penalty, usually 0.25-0.5% in the first three to six months.

Pijush Kanti Biswas

Arbitrage fund is a type of equity mutual fund, whereas Liquid fund is a type of debt mutual fund.

Choosing between arbitrage fund and liquid fund, varies from investor to investor depending on various parameters. Following are the comparison between these two-investment instrument on various parameters:

1.    Liquidity: liquidity of liquid fund is far better than arbitrage fund. It takes 3 to 5 days to redeemed an arbitrage fund in contrast liquid fund can be encashed within a day.

2.    Return on investment: Arbitrage fund provides slightly better return on investment when compared to liquid fund.

3.    Tax benefit: Arbitrage fund being a type of equity fund, are tax free on capital gain if hold for more than 1 year. No such tax exemption on capital gain from liquid funds at maturity.

4.    Risk factor: Liquid funds are debt fund so are much safer option of investment as compare to arbitrage investment.

5.    Research: Extensive market research is needed in case of arbitrage fund. Arbitrage funds rely too much on fund houses as compared to liquid funds.

6.    Exit penalties: Liquid funds don’t have exit penalties, but arbitrage funds attract premature withdrawal penalty, usually 0.25-0.5% in the first three to six months.

Hope you got your answer and choose between these two investment instruments as per your needs.

Happy Investing!

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