When it comes to low-risk investment options in India, most people consider Fixed Deposits (FDs) their go-to choice. However, with rising financial awareness and smarter tax-saving strategies, Arbitrage Funds are gaining popularity — especially among high-net-worth individuals and those in higher tax brackets. But which one is better for you?
Let’s break it down in detail, with practical insights and numbers.
1. What is an FD and What is an Arbitrage Fund?
Fixed Deposit (FD):
A fixed deposit is a savings scheme provided by banks and NBFCs where you deposit a lump sum for a fixed period at a fixed interest rate. It is considered a safe and predictable investment with guaranteed returns.
Arbitrage Fund:
An arbitrage fund is a type of mutual fund that leverages the price differences in the cash and derivatives markets of stocks. It buys shares in the cash market and simultaneously sells them in the futures market to lock in risk-free profits. Though categorized as equity for taxation purposes, arbitrage funds carry very low equity risk.
2. FD vs. Arbitrage Fund: Key Differences
| Parameter | Fixed Deposit (FD) | Arbitrage Fund |
| Returns | Fixed (e.g., 6.5%) | Market-linked (typically 6-8%) |
| Taxation | Taxed as per income slab (up to 30%) | 12.5% Capital Gains Tax (Long-Term) |
| Risk | Virtually no risk | Very low risk |
| Liquidity | Premature withdrawal penalty | T+1/T+2 redemption, exit load if <30-90 days |
| TDS | Applicable | Not applicable on capital gains |
| Minimum Investment | As low as Rs. 1,000 | Usually Rs. 500 or SIPs available |
| Safety of Capital | Fully secure up to Rs. 5 lakh per bank (DICGC insured) | NAV fluctuations possible but capital largely protected |
| Ideal Tenure | Short to medium term | 3 months to 1 year |
| Returns Predictability | Guaranteed | Slightly variable but stable |
| Regulatory Body | RBI | SEBI |
3. Practical Example: Rs 1 Crore Investment for 10 Years
Let’s say you invest Rs 1 crore in both options for 10 years. Assume:
– FD interest rate: 6.5% p.a.
– Arbitrage fund return: 7.5% p.a.
– Your tax rate: 30% for FD interest
– Capital gain tax on arbitrage: 12.5% effective rate over 10 years (long-term gains)
A. FD Investment (with annual taxation):
Since FD interest is taxed yearly, it reduces the compounding effect.
– Post-tax maturity value = Rs 1,00,00,000 compounded annually at net 4.55% after tax
– Final maturity value = Rs 1,56,04,159
B. Arbitrage Fund Investment:
– Pre-tax maturity = Rs 2.06 crore
– Capital gain = Rs 1.06 crore
– Tax = 12.5% of Rs 1.06 crore = Rs 13.25 lakh
– Post-tax maturity value = Rs 1.93 crore
Difference in Post-Tax Returns: ~ Rs 37 lakh in favor of Arbitrage Funds!
4. Why Arbitrage Funds are Gaining Popularity
– Tax Efficiency
– Better Liquidity
– Market Neutral Strategy
– Ideal for Corporates & HNIs
5. When Should You Prefer FDs?
– Guaranteed returns
– Lower tax bracket
– Senior citizen special FD rates
– Discomfort with mutual funds
6. The Munafawaala Way: Smarter Investing with Expert Guidance
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