Swaraj Finpro

Arbitrage Funds or Fixed Deposits: Which is Better?

When it comes to securing your financial future, choosing the right investment vehicle is crucial. For many investors in India, fixed deposits (FDs) have been a go-to option due to their safety and guaranteed returns. However, with the evolving financial landscape, arbitrage funds have emerged as an attractive alternative. As a Mutual Fund Fistributor in India, we aim to shed light on the benefits and drawbacks of both options to help you make an informed decision.

Understanding Arbitrage Funds and Fixed Deposits

Arbitrage Funds:

Arbitrage funds are a type of mutual fund that capitalize on price differences between the cash and derivative markets to generate returns. They buy in the cash market and sell in the futures market, aiming to profit from the price discrepancy. These funds are typically less risky compared to pure equity funds and are classified as equity funds for tax purposes.

Fixed Deposits:

Fixed deposits are a traditional investment option offered by banks and financial institutions. They provide a fixed rate of interest over a predetermined period, making them a low-risk investment. The principal amount is safe, and returns are guaranteed, which makes FDs a preferred choice for conservative investors.

Comparing Returns

Arbitrage Funds:

Arbitrage funds usually offer higher returns than fixed deposits, especially in a volatile market where price discrepancies are more frequent. While the returns are not as high as pure equity funds, they are generally better than most debt instruments.

Fixed Deposits:

FDs provide a fixed interest rate, which can range between 5-7% per annum, depending on the bank and tenure. The returns are stable and predictable, making FDs suitable for risk-averse investors.

Tax Efficiency

Arbitrage Funds:

One of the significant advantages of arbitrage funds is their tax efficiency. They are treated as equity funds for tax purposes. If held for more than one year, the gains are considered long-term capital gains (LTCG) and taxed at 10% beyond an exemption limit of ₹1 lakh. Short-term capital gains (STCG) are taxed at 15%.

Fixed Deposits:

Interest earned on fixed deposits is fully taxable as per the investor’s income tax slab rate. This can significantly reduce the post-tax returns, especially for those in higher tax brackets.


Arbitrage Funds:

Arbitrage funds offer higher liquidity compared to FDs. Investors can redeem their units at any time, although it is advisable to hold them for at least one year to benefit from favorable tax treatment.

Fixed Deposits:

While FDs can be broken before maturity, doing so typically incurs a penalty and results in a lower interest rate. This makes FDs less liquid compared to arbitrage funds.

Risk Factors

Arbitrage Funds:

Although arbitrage funds are considered low-risk, they are not entirely risk-free. Market conditions can affect the availability of arbitrage opportunities, impacting returns. However, the risk is still lower than pure equity funds.

Fixed Deposits:

FDs are virtually risk-free as they are not affected by market fluctuations. The principal amount and interest are guaranteed, providing a high level of security for investors.

Other Alternatives

For those considering systematic investment plans (SIPs), exploring the best SIP provider is crucial to ensure consistent and efficient returns. While arbitrage funds can be a part of your SIP portfolio, it’s also essential to look into other investment options like P2P lending in India and Equity basket to diversify your portfolio.

P2P Lending India:

Peer-to-peer lending is an alternative investment avenue where you can lend money directly to borrowers in return for interest. This can offer higher returns compared to traditional investments but comes with its own set of risks.

Equity All Rounder:

Investing in well-rounded equity basket that perform consistently across market conditions can provide balanced growth and stability to your portfolio.


In conclusion, whether arbitrage funds or fixed deposits are better for you depends on your financial goals, risk tolerance, and investment horizon. Arbitrage funds offer higher returns and tax efficiency, making them suitable for investors looking for moderate risk and better post-tax returns. On the other hand, fixed deposits provide safety and guaranteed returns, ideal for conservative investors seeking stability.

We recommend diversifying your portfolio to balance risk and reward effectively. Consult with a financial advisor to tailor an investment strategy that aligns with your specific needs and objectives.

Leave a Comment

Your email address will not be published. Required fields are marked *