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lirik lagu when to choose arbitrage funds over liquid funds - aty

investors generally choose liquid funds and arbitrage funds to manage funds on a short~term basis. both of them aim to provide relative stability with moderate risk compared to equity funds, and several important ways differentiate their actual functioning, taxation, and suitability. understanding these differences helps investors determine just when arbitrage funds might suit them more than liquid funds

what are arbitrage funds?
arbitrage funds serve as hybrid mutual funds that (presumably) try to capitalize on price differences in the cash and derivatives markets. they seek to buy an asset in one market and sell it almost simultaneously in another market, profiting from the price discrepancy between the two markets. while these funds largely invest in equities, their hedging strategy tends to lower their risk profile compared to normal equity funds

what are liquid funds?
liquid funds form a class of debt mutual funds, which, as the name suggests, invest in fixed~income instruments with very short maturities to provide liquidity and stable returns with minimal price fluctuations. such instruments may include treasury bills, commercial papers, and certificates of deposits, amongst others

when should investors consider arbitrage funds over liquid funds?
the decision regarding whether to choose arbitrage funds or liquid funds depends on various factors including tax treatment, expected returns, market circumstances, and investment period. below are the conditions in which investors may prefer arbitrage funds:

1. investment horizon of more than 3 months
if you look to park funds for a period longer than three months but less than a year, then you could consider arbitrage funds. liquid funds generally suit an investment horizon from a few days to three months; arbitrage funds may yield higher returns over liquid funds if held over three months, but market conditions determine this

2. better tax treatment
under tax laws, the system treats arbitrage funds as equity funds. if investors hold such funds for more than one year, then any gain classifies as long~term capital gain (ltcg), subject to a reduced tax rate of 10% beyond the prescribed limit. short~term capital gain, if investors hold the fund for less than a year, shall be taxed at the rate of 15%. on the other hand, tax laws classify any gain from a liquid fund according to debt taxation rules, where the system clubs gains with the individual’s income for the taxation slab applicable if held for less than three years. for individuals falling in higher tax slabs, arbitrage funds could provide better post~tax returns than liquid funds. tip: generally, sip calculators can help estimate returns on systematic investments in arbitrage funds, but such estimates are not assured candidates

3. when the market is volatile
arbitrage funds earn returns mainly from price differences in different market segments, which often become much wider during volatile periods. under such situations, these funds could achieve higher returns compared to liquid funds. however, this return would depend on the level of arbitrage opportunity existing in the market at that point

4. if one prefers equity~like taxation with lesser risk exposure
while arbitrage funds primarily base their strategy on equities, these funds hedge their positions to mitigate exposure to market direction. such a structure allows investors to profit from equity~like tax treatment without exposing themselves to equity~like market risk. investors seeking a cautious approach yet desiring the equity tax benefit may consider arbitrage funds

factors to consider
here are a few things investors should consider before choosing between arbitrage funds and liquid funds:
trading hours india: the distinction for arbitrage funds is that they involve trading in both cash and derivatives segments and are, therefore, subject to trading hours in india: 9:15 am to 3:30 pm. in contrast, liquid funds operate more on debt and money markets, where the timings could differ

mcx holidays: mcx holidays mainly affect the commodity market; however, the impact on market liquidity remains indirect. during trading halts, diminished partic~p~tion can affect arbitrage opportunities in the medium run, though such influence is, for the most part, short~term

market conditions: the availability of arbitrage opportunities depends on market~level inefficiencies. in very stable markets, such opportunities may not exist at all, making liquid funds more predictable

conclusion
choosing between arbitrage funds and liquid funds entails considering investment horizon, existing tax situation, and current market condition. if you have a short~to~medium investment horizon, fall in a higher tax bracket, and the market offers enough price gaps to exploit, arbitrage funds could prove worthwhile. before deciding on either option, take the time to assess your risk appetite and consult with a qualified investment professional regarding how each option aligns with your overall financial objectives

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