The main difference between an Arbitrage Fund and a Fixed Deposit (FD) is that arbitrage funds, being market-linked, offer potentially higher returns but with more risk. On the other hand. FDs provide stable, lower returns with minimal risk and are not influenced by market fluctuations.
Content:
- Arbitrage Fund Meaning
- What Is Fixed Deposit
- Arbitrage Funds Vs Fixed Deposits
- Difference Between Arbitrage Fund and FD – Quick Summary
- FD Vs Arbitrage Fund – FAQs
Arbitrage Fund Meaning
An Arbitrage Fund is a type of mutual fund that exploits price differences in cash and derivatives markets to generate returns. These funds aim to offer minimal risk by simultaneously buying and selling securities, thereby benefiting from asset differential pricing.
Arbitrage funds operate by capitalizing on price discrepancies between cash and futures markets. They buy stocks at a lower price in the cash market and simultaneously sell in the futures market, at higher prices.
This strategy aims to generate returns from the difference in prices, regardless of market direction. These funds typically offer lower risk compared to pure equity funds, making them suitable for conservative investors seeking steady, moderate returns.
Imagine a stock priced at ₹100 in the cash market but ₹102 in the futures market. An arbitrage fund buys at ₹100 and sells futures at ₹102, profiting ₹2 per share, minus costs.
What Is Fixed Deposit?
A Fixed Deposit (FD) is a financial instrument banks offer, where money is deposited for a fixed term at a predetermined interest rate. It guarantees the return of the principal and earned interest upon maturity, providing a secure, low-risk investment option.
A Fixed Deposit is a secure investment where you deposit a lump sum with a bank for a specific duration. The bank pays interest at a fixed rate, which is higher than a regular savings account.
Upon maturity, the deposited amount plus the accrued interest is returned. FDs are popular for their safety and predictability, making them a preferred choice for risk-averse investors and those seeking stable income generation.
For example: If you deposit ₹1,00,000 in a Fixed Deposit at a 6% annual interest rate for 5 years, you will receive ₹1,33,822 at maturity, combining your principal and interest earned over the term.
Arbitrage Funds Vs Fixed Deposits
The main difference between Arbitrage Funds and Fixed Deposits is that Arbitrage Funds seek potentially higher returns by exploiting market inefficiencies, carrying moderate risk. On the other hand, Fixed Deposits offer stable, lower returns with the safety of principal and interest guarantees, positioning them as a safer, low-risk investment option.
| Feature | Arbitrage Funds | Fixed Deposits |
| Risk | Moderate, depending on market conditions | Low, as they are not subject to market fluctuations |
| Returns | Potentially higher, varies with the market | Fixed, lower returns compared to equity-linked investments |
| Investment Strategy | Exploits price differences in markets | Simple deposit with a fixed interest rate |
| Liquidity | Generally higher, can be redeemed easily | Lower, early withdrawal may attract a penalty |
| Taxation | Taxed as per equity fund taxation rules | Interest is taxed as per the individual’s tax slab |
| Suitability | Suitable for risk-tolerant investors seeking moderate returns | Preferred by risk-averse investors seeking guaranteed returns |
Difference Between Arbitrage Fund and FD – Quick Summary
- The main difference between Arbitrage Funds and Fixed Deposits is that Arbitrage Funds seek higher returns by utilizing market inefficiencies and carry moderate risk, while Fixed Deposits offer stable, lower returns with guaranteed principal and interest, ensuring a safer, low-risk investment.
- An Arbitrage Fund is a mutual fund exploiting cash and derivatives market price differences to yield returns. It aims for minimal risk by concurrently buying and selling securities, capitalizing on asset price differentials.
- A Fixed Deposit is a bank-provided financial tool where money is stored for a set period at a fixed interest rate. It ensures the return of both principal and interest at maturity, offering a secure, low-risk investment choice.
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FD Vs Arbitrage Fund – FAQs
What is the Difference Between Arbitrage Fund and FD?
The main difference is that Arbitrage Funds seek higher, variable returns by exploiting market inefficiencies with moderate risk, while Fixed Deposits offer lower, fixed returns with high safety, guaranteeing the principal and interest.
Is Arbitrage Fund Tax-Free?
Arbitrage Funds are not tax-free. They are taxed as equity funds, with short-term capital gains taxed at 15% for holdings under one year, and long-term gains over one year taxed at 10% without indexation benefits.
Can Arbitrage Funds Give Negative Returns?
Yes, Arbitrage Funds can give negative returns, particularly in stable or low-volatility market conditions where arbitrage opportunities are limited. However, they are generally considered lower risk compared to pure equity funds.
How Do Arbitrage Funds Work?
Arbitrage Funds work by exploiting price differences between cash and derivatives markets. They buy stocks at lower cash market prices and sell futures at higher prices, aiming to profit from the price differential, while minimizing risk.
Is Fixed Deposit Taxable?
Yes, Fixed Deposits are taxable. The interest earned on FDs is added to your total income and taxed according to your income tax slab. TDS is also deducted if interest exceeds a certain limit annually.
Does the Fixed Deposit Interest Rate Change?
Fixed Deposit interest rates can change over time, but once you open an FD, the rate remains fixed for its tenure. Future FDs will be subject to the prevailing rates at the time of investment.
