Where would you park your fund for 91 days?
Fixed Deposit
91-Day TBills
Arbitrage Funds
Liquid Funds
You can vote for more than one answer.
I was looking at parking funds for 3 months, and did some basic research on options. I do not think twice about just keeping it in FDs or in the savings account, but that is because of sheer laziness. I am hoping blogging this makes me get more disciplined in the way I manage my short term funds, and gives more options to folks who chance upon this blog.
I examined four types of options based on the following assumptions (Scroll down in case any of the below are not familiar terms)
Option | Assumption |
Fixed Deposit | ICICI Bank FD for 91 days |
91-Day Treasury Bill | Based on the RBI Retail Direct site issued on 19-Jan with maturity of 20-April-2023 |
Artbitrage Funds | Assuming past performance of 3Months absolute returns will hold true for the next 3Months, Choice of fund house: Invesco |
Liquid Fund | Assuming past performance of 3Months absolute returns will hold true for the next 3Months, Choice of fund house: Mirae |
I chose an initial investment of INR 4,92,137 . Why this number? Because this is the number that gave me a return of INR 5Lacs on the 91-tbill that was issued on 19-Jan-2023!
How do the four options compare?
This is a cut and dry comparison of returns based on each option.
​ | 91-Day-TBill | FD:91days | Arbitrage Funds | Liquid Fund |
Invested Amount | Rs. ​4,92,137 | Rs. ​4,92,137 | Rs. ​4,92,137 | Rs. ​4,92,137 |
Maturity value | INR 5,00,000 | INR 4,97,658 | INR 5,01,241 | INR 5,00,503 |
Tax rate assumed | 30% | 30% | 15% | 30% |
Annualized Returns- Post tax | 4.56% | 3.19% | 6.46% | 4.86% |
Annualized Returns - Pre tax | 6.56% | 4.58% | 7.63% | 7.00% |
Is the math all we need to consider?
The convenience of MF and FDs are definitely higher than t-bills since they can be executed through existing platforms. Worst case, if somene doesnt have an MF investment, getting one up is easy-peazy in these days of e-KYC. T-bills are not so easy to the uninitiated (though not rocket science). Most platforms now including ICICI, HDFC and Coin /Zerodha provide for purchasing government securities. If you want to go straight to the source, you can do what I did, and open an RBI retail direct account. I will blog about that soon, but it was a seamless process with no in-person/physical paper work. Long live e-kyc.
That said, one key thing to be kept in mind is liquidity of t-bills is very limited to non existent due to low trading volumes in the retail secondary market. In other words, be prepared to lock in the funds for full 91-days! With FDs, liquidation is instant, and with most Mutual funds, funds will hit within 24-48 hours.
Note: Both Arbitrage and liquid funds may actually give us higher or lower returns, since they are riskier than the FDs or 91-Day tbills. However, in general, both are comparatively low risk compared to other equity/debt funds
In summary, Arbitrage Mutual Funds for parking money in the short term are looking like the most lucrative option esp. given the 15% capital gain tax which makes it more attractive than the other options. I would personally avoid FDs for short term parking.
PS: For folks not familiar with some of the concepts above: , here is the simple explanation:
Treasury Bills, or T-bills, are short-term debt instruments issued by the Indian government through the Reserve Bank of India (RBI) to raise funds for less than a year. They come in three tenures: 91 days, 182 days, and 364 days, with the longer tenures having higher risk and higher return. T-bills are sold through auctions at a discount to the face value of INR 100 and always redeemed at INR 100, providing a safe and guaranteed return. We can invest in them via most brokerage platforms nowadays, and directly via the RBI Retail Direct platform
Arbitrage Mutual Funds are a type of mutual fund in India that take advantage of price differentials in different markets to generate returns for investors. They do this by simultaneously buying and selling the same security in different markets, such as the cash and futures (derivative) markets. Effectively this is less of a risk than other trades, and hence the returns are not very high either. But it is a relatively safe option and since the fund is buying and selling equity based instruments, the gains are treated like Equity Mutual Funds
Liquid funds are a type of mutual fund in India that invest in short-term money market instruments such as commercial paper, treasury bills, and certificates of deposit. They are low-risk investments that offer higher returns than traditional savings accounts, making them a popular option for investors who want to park their money for a short period of time.These funds are highly liquid, which means that they can be easily redeemed without any exit load or penalty