An arbitrage fund and a fixed deposit both give a company's spare cash a place to earn, but they differ on how you get the money out, how safe they are, and how they are taxed. For a company with surplus cash sitting in a current account, deciding between these two depends on the company's timeline and its tax position.
Why look beyond the current account?
In India, a current account pays no interest. This means any money your company leaves there earns nothing while it waits for salaries, rent, vendor bills, or tax. For businesses that collect money before they spend it, such as consultancy firms or schools, this idle cash can sit for months without doing any work.
The usual alternative is a fixed deposit. An FD is a bank deposit, and its interest rate is fixed when it is opened. This certainty is its main strength. However, an FD asks your company to pick, months ahead, the day it will need the money. If you need that cash earlier to meet an unexpected vendor bill or tax payment, breaking the FD usually costs a penalty.
There is also a specific tax point to consider. FD interest is taxed every year as it builds up, even before the FD matures. Your company may find itself paying tax on interest it has not yet received in its bank account.
How do an FD and an arbitrage fund compare side by side?
For spare cash that might not be needed for several months, a company might look at arbitrage funds as an alternative to the familiar bank deposit. They are built for different goals, and seeing them side by side helps clarify which fits your company's situation.
| Fixed deposit | Arbitrage fund | |
|---|---|---|
| What it is | A bank deposit with an interest rate fixed when it is opened | A mutual fund that is not bank-guaranteed and whose value can move |
| Getting money out | You pick the maturity date months ahead | You can take money out at any time but it pays out more slowly than a liquid fund |
| Safety | A bank-guaranteed deposit | A mutual fund that can dip over short periods |
| Early exit | Breaking an FD early usually costs a penalty | These funds usually charge for early exit |
| Tax | Interest is taxed every year as it builds up even before maturity | Gains are taxed like equity: 20% if held under 12 months and 12.5% after |
What it is. An FD is a contract with a bank where you know the return from the start. An arbitrage fund is a type of mutual fund. It is not bank-guaranteed, and its value can move. While it aims for stability, it is still market-linked.
Getting money out. This is where the mechanics differ. An FD ties your money to a specific date. An arbitrage fund allows your company to take out part or all of the money when needed, but it pays out more slowly than liquid funds. If your company takes money out very soon after moving it in, there is usually a charge for early exit.
Safety. An FD is a bank deposit and provides the security of a fixed rate. An arbitrage fund is not bank-guaranteed. Because its value can move, it can dip over short periods. This makes it a different risk profile for a company compared to a bank deposit.
Tax. This is often why a company looks at arbitrage funds. FD interest is taxed at the company's normal tax rate every year as it accrues. Arbitrage fund gains are taxed like equity when the units are sold. The rate is 20% if held for less than 12 months and 12.5% if held for longer. The difference is both the rate and the timing of the tax payment.
Which choice fits your company's spare cash?
Whether an FD or an arbitrage fund fits depends on the specific job that money has to do.
An FD fits money with a fixed, known date. If the company is certain it will not need the cash until a specific date in the future, the certainty of a bank deposit and a fixed rate is a strong advantage. In this case, the flexibility of a mutual fund may not be necessary.
An arbitrage fund fits if the company prioritises different tax treatment. If the spare cash is likely to stay for several months and the company wants to use equity tax rates, an arbitrage fund might fit. The company must be comfortable with the fact that the fund is not bank-guaranteed and that payouts are not immediate.
Different types of businesses have the permission to use these tools. Private and public limited companies can invest in mutual funds once the board approves it. LLPs and partnership firms can also do so if their agreement or deed allows it. For a charitable or educational trust, holding units of SEBI-registered mutual funds is possible under the Income Tax Act if the trust deed allows it.
In every case, the decision of whether to use an FD or an arbitrage fund for spare cash belongs to the company.
Idlewise is offered by Sigfyn Financial Services Private Limited, an AMFI-registered mutual fund distributor (ARN-254976). Sigfyn distributes mutual funds; it does not provide investment advice. Mutual fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not indicative of future returns.