Don’t settle for low rates on parked money Parking your bonus, dividend or emergency cash in a liquid fund may seem safe—but if you earn over ₹2 lakh in interest, you’ll be taxed at your top slab. That defeats the point of saving. An arbitrage fund typically yields 6-8% annual return, yet enjoys equity tax treatment. No taxes if held over a year and gains under ₹1 lakh. Two minutes into your phone is all it takes to switch.
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Arbitrage vs. liquid: compare the waits Liquid funds let you withdraw quickly—T+1 day—making them handy for immediate needs. Arbitrage funds take an extra day for redemption (T+2), but that’s often manageable for most planned expenses. For a slightly longer hold, arbitrage offers much better post-tax returns. It’s one small time trade-off that pays off, especially if you’re in a higher tax bracket.
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How to use this strategy effectively Keep your emergency stash in a liquid fund, but move surplus short term cash into arbitrage funds. Let it sit for 12–18 months. Use this window to avoid short-term capital gains tax and still maintain reasonable liquidity. Monthly investments via SIP into arbitrage can also smooth out NAV swings, though many treat this as an exit-draining destination rather than core equity.
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When liquid still makes sense If you're in the new tax regime (with fewer exemptions), or if your interest income is under ₹10,000 annually, liquid funds can still be fine. They’re simple, familiar, and dependable. But inflation-adjusted returns remain modest. Arbitrage offers a smarter upgrade when your tax bracket or cash flow allows for a bit more discipline.
Smart habits beat headline returns You don’t need to chase mutual fund rankings. What matters more is where your everyday cash sits. Untouched funds, forgotten bonus money, idle savings—they’re costing you silently. Switching those idle sums into arbitrage funds takes minutes but can improve your real yield over time. Consistent review of parked cash equals a small but meaningful win.
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Make tax-efficient investing part of your routine Every financial year, look at where your idle money resides. If it’s earning very little or taxed heavily, reallocate it. Arbitrage funds are a good bridge between zero-return accounts and high-risk equity. They give better post-tax returns without locking you out completely. Gradually, this habit builds discipline and reduces tax drag—without making your money feel frozen.
