In 2025, the Reserve Bank of India lowered its benchmark repo rate by 100 basis points to 5.50%, reducing borrowing costs but also prompting banks to cut interest rates on deposits. This poses a challenge for savers seeking better returns on their surplus funds. As traditional savings account interest rates drop to around 2.5%, alternatives like liquid and arbitrage funds become attractive options.
Liquid funds, which are debt mutual funds, invest in short-term fixed-income instruments, offering high liquidity and competitive returns between 5 to 7% annually. They are considered low-risk due to their investment in high-quality securities and are popular among corporations and individual investors for short-term goals or emergency funds.
Arbitrage funds, on the other hand, exploit price differences between spot and futures markets, providing a low-risk investment with the benefit of equity taxation. These funds have gained interest due to their competitive returns and tax efficiency, especially for investors in higher tax brackets.
Both liquid and arbitrage funds offer returns significantly higher than savings accounts, making them worthwhile alternatives. However, their tax treatments differ, with liquid funds taxed based on the purchase date and arbitrage funds benefiting from equity taxation. Investors should consider their financial goals and tax implications when choosing between these options.
