Arbitrage Fund or Liquid Fund

Arbitrage Funds or Liquid Funds

Arbitrage Funds	Liquid Funds
Meaning
These funds work by exploiting the price difference between cash market and future market and buying and selling the funds simultaneously. For eg. A stock of ABC ltd is available on the BSE, NSE (cash market) at Rs 200, whereas the same stock is available in derivative market (future market) at Rs 220., so in this case the fund manager would buy the stocks from open market and sell them in future market. The difference between the purchase and sale price will be the return for funds.	Liquid funds are debt schemes which invest in debt instruments such as treasury bills, commercial papers, certificate of deposits, etc. if one wishes to invest in equity funds but also stagger it, the investor can opt for systematic transfer plan (STP) wherein the funds would be invested in equity funds from debt funds in each month.
Type of Fund
This fund is considered as equity fund, as the fund has to invest minimum 65% of its asset in equity and its related instruments.	This fund is considered as debt fund because of the instruments in which the funds invest.
Taxability
As these funds are equity funds, the taxability will be as follows: If the investment is sold within 1 year, the gains will be taxed at 15%. If the investment is sold after 1 year, the gains above Rs 1 lakhs will be taxable at 10%.	As these funds are debt funds, the taxability will be as follows: If the investment is sold within 3 year, the gains will be taxed at slab rates. If the investment is sold after 3 year, the gains will be taxable at 20% after giving the benefits of indexation.
Risk
This fund is slightly riskier as compared to liquid funds, as the returns are depended on the market performance.	This fund is less risky, as the investments are made in government securities which provide fixed returns hence are considered less risky.

Thank you,
Regards,

Author – Gaurav Sureka,

Kautilya,

IBS Mumbai