InvestorQ : Are FMPs and arbitrage funds a good choice for short term money parking?
prachi Patwardhan made post

Are FMPs and arbitrage funds a good choice for short term money parking?

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Moii Chavate answered.
3 years ago
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Fixed maturity plans are closed-ended funds with tenures starting from 1 year. A 1-year FMP will typically invest only in 1 year debt to avoid the risk of maturity mismatch. As a result, FMPs become quasi-assured return investments. Investors need to be careful as the funds will be locked in for the specific period and cannot be liquidated. FMPs are listed on stock exchanges. Here you need to hold an FMP for at least 3 years to get the tax benefit of LTCG.

Arbitrage Funds are quite popular among short term investors. These mutual funds create a hybrid portfolio by buying equities and selling equivalent stock futures. As a result the difference is locked in as assured profit. Since arbitrage funds hold more than 65% in equities, they are classified as equity funds. Capital gains on these funds become tax free after 1 year, adding to the attractiveness of returns in post-tax terms. Here again, the benefit of LTCG is available only after a year but with the tax rate difference just at 5%, this may not really matter.

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