Arbitrage Funds: Park Idle Cash, Beat FD Tax?

Arbitrage funds buy stocks in one market and sell in another to pocket small, steady gains. They're taxed like equity, which makes them more efficient than FDs for people in higher tax brackets parking money for 3–12 months.

Here's what happened: Zerodha Fund House has launched a new arbitrage fund targeting investors who want to park surplus cash for short periods with lower volatility than pure equity funds.. Arbitrage funds earn returns by simultaneously buying stocks in the cash market and selling equivalent futures contracts, locking in small price-gap gains with minimal directional risk.. The minimum investment is set at ₹5,000, making the fund accessible to salaried individuals and small business owners managing short-term cash flow..

What you should do: Compare post-tax returns: calculate your FD interest after deducting tax at your income slab, then compare with an arbitrage fund's historical 1-year returns minus 20% LTCG — the gap often surprises.. Check your investment horizon before choosing: arbitrage funds work best for 3 months to 1 year; for anything under 3 months, liquid funds or ultra-short debt funds are typically more predictable.. Review the fund's expense ratio and exit load before investing — many arbitrage funds charge an exit load of 0.25–0.5% if you redeem within 30 days, which can eat into short-term gains..

Arbitrage fund gains held over 12 months qualify as Long-Term Capital Gains taxed at 12.5% — but gains below ₹1.25 lakh per year are completely tax-free, making small SIP amounts effectively zero-tax for many investors.

For readers weighing their credit and loan options, our personal loan guide and CIBIL score resources put this update in context.