Arbitrage fund vs liquid fund for short-term parking

Tue, 12 May 2026 00:00:00 +0000

Arbitrage funds and liquid funds are both used for short-to-medium term cash parking in India, but they differ in investment strategy, risk profile, liquidity, and above all in tax treatment. The tax difference is the main reason arbitrage funds are chosen over liquid funds by investors in the higher income-tax brackets for holding periods of one year or more.

The decisive point: an arbitrage fund maintains 65 per cent or more equity exposure, so it is taxed as an equity-oriented fund (12.5 per cent LTCG above the Rs 1.25 lakh annual exemption under Section 112A ), while a liquid fund is taxed as a specified mutual fund at slab rate after the Finance Act 2023 Section 50AA change. For a high-bracket investor the differential favours the arbitrage fund for short-term parking even though both carry similar low-volatility profiles.

Equity Fund Tax on WebNotes

Arbitrage fund vs liquid fund for short-term parking