Omkar Salvi, in the highest tax slab, parks Rs 25 lakh for three months. A liquid fund yields 6.8% taxed at slab (assume 30%) and an arbitrage fund 6.4% taxed as short-term equity gains (assume 20%). Which leaves more after tax, and what risk does the arbitrage fund add?

On the assumed rates the arbitrage fund leaves more: about 5.12% a year after tax against 4.76%, roughly Rs 2,250 more over three months. The gain is small and comes with conditions: the arbitrage yield moves with market spreads and can fall, NAV can dip for a few days, and an exit load usually applies to early redemptions. For money that must be ready on a known date, the margin is thin enough that either fund is defensible.

Two job offers paying Rs 1 lakh and Rs 95,000 a month look easy to rank until one comes with a higher tax deduction at source. For a client in the top slab, the rate of tax on a fund's gains can matter more than a few tenths of a per cent of yield. The liquid fund keeps 70% of what it earns, the arbitrage fund 80%, on the rates assumed here. That ten point difference is worth more than the 0.4 point gap in yield.

Rs 2,250 on Rs 25 lakh is real money but not much of it. The edge is small enough that any of three things can erase it, and a good answer names them. The breakeven is useful here: the arbitrage fund wins only while its pre-tax yield stays above 5.95%, the rate at which 80% of it equals the liquid fund's 4.76%.

First, the yield is not fixed. An arbitrage fund earns the gap between a share's cash price and its futures price, and that gap shrinks when markets are calm or when many funds chase the same trades. If it drops to 5.6% for the quarter, Omkar keeps about Rs 28,000, less than the liquid fund's Rs 29,750. A liquid fund's yield moves too, but with short-term money market rates, which change more slowly.

Second, the NAV can dip. The fund marks both legs of each trade to market every day, so on a volatile day the futures price can move away from the cash price and the NAV can fall slightly before recovering at expiry. Over three months that usually washes out, but a client who must redeem on a fixed day may catch a dip. Third, arbitrage funds usually charge an exit loadA charge, as a percentage of the amount redeemed, deducted when units are sold within a set period after purchase. on redemptions within a short period, often about a month; at an assumed 0.25%, that is Rs 6,250, more than the whole after-tax advantage, if Omkar's purchase date moves forward. Confirm the load in the scheme document.

So the advice depends on how firm the date is. If the flat payment is fixed for three months or later, the arbitrage fund leaves a little more, on today's assumed rates. If the payment could come at any time, the liquid fund's daily liquidity and steadier NAV are worth the small difference. Either way, the comparison must be rerun on the client's actual slab, surcharge and the tax rules in force when he invests.