Recently, the markets regulator, Sebi, changed the norms for the valuation of debt securities. Many experts feel that on implementation of the new norms, arbitrage funds can be a better alternative to liquid funds, especially for those who have an investment horizon between one and two years.
Arbitrage funds are hybrid funds that invest in equity shares and the futures market but generate returns that are in line with short-term debt funds.
They are also more tax efficient. If the investor redeems investments
after one year, the gains from overall equities are tax-free up to Rs 1 lakh. Beyond this limit, the investor has to pay 10 per cent long term capital gains tax. The short-term capital gains tax is also lower than other debt funds at 15 per cent.