Use overnight funds for your immediate needs, says Dhirendra Kumar
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Should I retain Rs 35 lakh kept in arbitrage funds or move to overnight funds? This money is kept for future investments. I'm a retired person.
I find arbitrage funds to be reasonably safe but its safety is derived from the stock exchange mechanism. These funds intend to derive returns from the arbitrage between the future and the cash market. These funds primarily invest in arbitrage opportunities and don't have any such exposure to credit risk. But if stock exchanges fail, arbitrage funds can fail. However, we have a regulatory mechanism whereby I find these funds to be reasonably safe.
Arbitrage funds are low-risk options and eventually, the risk-returns payoff turns out to be of the nature of liquid funds. But there can be times when these funds may not be a good alternative to liquid funds. Arbitrage funds are entitled to equity-like tax treatment, but many times they aren't able to find enough arbitrage opportunities and thus have to invest in fixed-income instruments. And investing beyond 35 per cent in debt-related instruments may disqualify them from the favourable equity-like taxation. So, that creates a problem and this happened in the past.
Therefore, I would say that one should be extremely careful. Keep a modest amount of money that you may need immediately in an overnight fund.