When does an arbitrage fund beat an FD?

When Arbitrage Funds Beat FDs: The Tax-Bracket Test

The answer is almost entirely about your tax bracket, not the gross yield.

The Core Comparison

Both instruments currently yield roughly similar gross returns. The gap opens at the post-tax level. ^[4]

The arbitrage fund wins at every holding period for a 30%+ bracket investor. ^[1]

Why This Works

Arbitrage funds hold ≥65% in equity (cash-futures arbitrage), so they get equity tax treatment — even though their returns behave like a liquid fund with no equity market risk. ^[4] The returns come from arbitrage spreads, not equity beta.

FDs, by contrast, are taxed at your full slab rate, with no holding-period benefit — a rule that has applied to debt Mutual Fund — definition">mutual funds equally since April 2023. ^[3]

When the FD Still Wins

• You're in the 0–10% tax bracket — the tax difference shrinks or disappears.
• You need a guaranteed, locked-in rate — an FD rate is fixed till maturity; an arbitrage fund's spread can compress. ^[5]
• You need DICGC deposit insurance — FDs are insured up to ₹5 lakh per bank. Arbitrage funds carry no such guarantee. ^[5]
• Horizon under 30 days — arbitrage funds have a small exit load window; FD premature penalty is predictable.

The Screening Question

"What is my marginal tax rate, and how long will this cash sit idle?"

If the answer is 30% bracket + more than 3 months → arbitrage fund is worth evaluating on post-tax yield. Below 20% bracket → the advantage narrows materially and FD simplicity may win.

Apply this → Compare your short-term parking options at Explore Funds — Arbitrage and filter by 1Y return + exit load period.