Equity Savings Vs Arbitrage Vs Income + Arbitrage Funds: Which Low-Risk, Tax-Efficient Option is Right for You
Are you looking for stable returns without giving up tax efficiency?
Wondering what the best investment options are after the withdrawal of indexation benefits on debt funds? You’re not alone.
The investment landscape has evolved rapidly.
With debt mutual funds now taxed at income slab rates regardless of holding period, investors are naturally gravitating toward alternatives that promise low volatility and better post-tax returns.
Enter three contenders: equity savings funds, arbitrage funds, and the newly minted income + arbitrage funds.
But while all three appear to offer similar tax advantages, their internal structures, risk levels, and long-term performance potential are remarkably different.
So how do you choose the one that fits your needs?
Understanding the difference between arbitrage funds and equity savings funds can help investors choose the most suitable tax-efficient investment for their short-term or medium-term goals.
Think of equity savings funds as a tri-blend cocktail: part equity, part arbitrage, and part debt.
This mix enables the fund to maintain a gross equity allocation of 65%, thereby qualifying it for equity taxation—a major win for investors seeking efficiency in returns.
But here’s the catch: the net equity exposure—the real market risk—varies significantly between funds.
While some maintain an aggressive 30–40% exposure to equity markets, others sit much lower, with even six funds in the category dipping below the 20% mark.
So before you assume you’re getting a balanced hybrid, ask yourself: have you checked what portion of your money is truly exposed to equity?
From a performance perspective, rolling one-year returns over the past decade show a broad range—from a maximum of 34.6% to a minimum of –10%, averaging around 9.9%.
Notably, negative returns occurred in just 5% of the time periods, reflecting overall stability with a bit of risk seasoning.
Who is this category best for?
If you’re a conservative investor with a moderate appetite for equity and a time horizon of 3–5 years, or a retiree seeking relatively stable income, this might be a strong contender in your portfolio.
Investors often compare equity savings funds vs arbitrage funds when seeking tax-efficient alternatives to traditional debt funds.
While equity savings carry moderate volatility, they can outperform arbitrage in the long run.
In a post-indexation world, innovation is inevitable—and income + arbitrage funds are a product of that evolution.
These funds, often structured as fund-of-funds, invest in a combination of arbitrage and debt-oriented schemes.
The trick lies in keeping the pure debt exposure below 65%, allowing them to sidestep the harsher debt fund taxation.
Why does this matter? Because it gives investors the potential to pay only 12.5% tax after two years, rather than their full slab rate.
The math is compelling: on a ₹1 lakh gain, someone in the 30% tax bracket pays ₹30,000 under old debt fund rules—but just ₹12,500 under this structure, saving ₹17,500.
However, it’s important to note that this category is still in its infancy. There’s no meaningful long-term performance data yet.
So while the structure is tax-smart, the execution remains to be proven.
Are you willing to try something new for a better tax outcome? Or would you rather wait and watch before stepping in?
These income arbitrage funds are gaining traction as investors seek efficient options that combine low risk with improved post-tax returns, especially for those replacing their debt fund holdings.
Arbitrage funds may not be flashy, but in a tax-conscious environment, they’re back in the spotlight.
These funds exploit price differences between the cash and futures markets, providing virtually no directional market risk.
In simple terms, you don’t have to worry whether the market is going up or down—they make money off the spread.
Historically, their one-year rolling returns have ranged from 3% to 9%, averaging around 6% over the last decade.
And here’s the best part: they’ve rarely posted negative one-year returns at the category average level.
So who should consider arbitrage funds? If you’re looking for a low-risk parking spot for your short-term money or emergency corpus—with the added bonus of equity-style taxation—arbitrage funds still do the job, quietly and reliably.
For short-term investment, arbitrage funds remain one of the best low-volatility, tax-efficient choices—especially for those investing ₹1 lakh for 1 year or looking for stable income without taking equity market exposure.
Structure:
Arbitrage Fund – Invests in cash and futures to earn from market price gaps.
Equity Savings Fund – Mixes equity, arbitrage, and debt to balance growth and stability.
Risk Level:
Arbitrage Fund – Very low, as positions are hedged.
Equity Savings Fund – Moderate, due to unhedged equity exposure.
Returns:
Arbitrage Fund – 5–7% annually, depending on market spreads.
Equity Savings Fund – 8–10% annually, influenced by equity performance.
Best Holding Period:
Arbitrage Fund – 6 months to 1 year.
Equity Savings Fund – 2 to 4 years.
Taxation:
Both qualify for equity taxation (15% STCG, 12.5% LTCG after 1 year).
Best For:
Arbitrage Fund – Short-term, low-risk investors seeking stable returns.
Equity Savings Fund – Medium-term investors seeking balanced, tax-efficient growth.
At a glance, these three fund categories all aim to deliver tax-efficient returns with varying levels of market exposure.
But do they perform the same way?
Each category plays a different role, and lumping them together because of similar tax treatment can lead to misplaced expectations.
So the real question is: what are you optimizing for—returns, stability, or tax savings?
In the arbitrage vs equity savings fund debate, it’s essential to note that arbitrage fund returns tend to be steadier, while equity savings funds can deliver better performance over 3–5 years but with higher volatility.
Understanding equity savings fund taxation is equally important—both are taxed as equity schemes, making them more efficient than traditional debt funds post-indexation.
Choosing between these options depends on more than just taxation—it’s about your investment horizon, risk appetite, and need for liquidity.
In a world where tax efficiency is the new alpha, these hybrid solutions offer smart ways to reduce tax drag. But no single fund type fits all investors.
So before making a decision, ask yourself: what’s your goal—safety, growth, or flexibility?
And does the fund you’re considering align with that goal?
If you’re comparing arbitrage fund vs equity savings fund for short-term goals, focus on liquidity and post-tax returns.
For medium-term wealth creation, equity savings funds may deliver better overall value.
Those seeking debt fund alternatives can explore equity savings schemes for better tax efficiency, while cost arbitrage and low-risk arbitrage strategies may suit conservative investors.
Would you like help evaluating your current asset allocation or rebalancing in line with your tax goals?
Consulting a Certified Financial Planner (CFP) can bring the clarity and personalised insight needed to make confident, tax-smart investment choices—especially in a post-indexation world.
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