Where to park Rs 20L for 10-12 months? Liquid funds vs Arbitrage funds?

Arbitrage funds are the ideal vehicle for parking capital for a 3 to 12-month horizon because they offer a debt-like risk profile with the tax advantages of equity. These funds work by buying a stock on one exchange and simultaneously selling it on another to capture minor price discrepancies. Because their underlying transactions deal in equities, they are taxed as equity funds for both short-term and long-term capital gains.

This makes them highly tax-efficient compared to traditional debt funds or fixed deposits, especially if you fall in the higher tax brackets. Liquid funds are also a fantastic option, as they invest in Treasury Bills issued by the RBI, making them the safest financial instruments in the country. They typically yield around 6% to 7%, which is a massive step up from traditional savings accounts that yield only 2.5% to 3% but unlike arbitrage funds they are taxed as Debt funds

SEBI regulations even allow instant withdrawals of up to Rs 50K per day from liquid funds directly to your bank account. However, for a larger sum like Rs 20L parked for 10-12 months, the equity taxation of arbitrage funds usually results in better post-tax returns. You might also look into Income Arbitrage Funds, which are structured as a Fund of Funds.

Disclaimer: All information shared above are strictly for educational and informational purposes only. It should not be construed as financial or investment advice.