Arbitrage Funds vs Fixed Deposits vs Bonds: Which One is Right for You in 2026?

If you’re a low-risk investor, you may be considering arbitrage funds, FDs, and bonds as investment options in 2026. But how do you decide? Should you stick with the safety of fixed deposits? Explore bonds for stable income? Or, opt for better post-tax returns with arbitrage funds?

To simplify your approach to this dilemma, we’ve condensed the arbitrage funds vs. fixed deposits vs. bonds debate in this article. You can read through it to find out which one suits your investment needs in 2026.

What are Arbitrage Funds?

While the term may seem difficult to understand at first, the meaning of arbitrage funds is pretty simple. Arbitrage funds are simply a type of mutual fund scheme that invests at least 65% of assets in equities and aims to generate returns by taking advantage of price differences of the same asset in the cash and futures markets. 

For instance, if a stock is priced at Rs. 1,000 in the cash market and Rs. 1,010 in the futures market, the fund buys it at Rs. 1,000 and simultaneously sells it for Rs. 1,010 in the futures market. The difference of Rs. 10 becomes the arbitrage profit. 

Key Features of Arbitrage Funds

• Equity Taxation: The AMFI classifies arbitrage funds as hybrid funds, but they are taxed as equity schemes.
• Risk Profile: Equity exposure of arbitrage funds is completely hedged. Therefore, virtually, they have no price risk.
• Volatility Impact: Increased market volatility may mean greater arbitrage opportunities. But low volatility may lead to lower returns as futures may trade at a discount to cash prices.
• No Profit Guarantee: As market-linked schemes, these funds do not provide profit guarantees.
• Management Fee: You have to pay the management fee of the fund, which can impact total returns.

What are Fixed Deposits?

Offered by banks and NBFCs, fixed deposits are term-based investment instruments, where you invest a lump-sum amount of money for a selected tenure to earn interest at a predetermined rate. 

The FD interest rate applicable on your deposit gets locked-in the day you book the deposit and remains the same throughout the tenure. 

Key Features of FDs

• Tenure Options: FD tenures can range from 7 days to 10 years.
• Fixed Returns: Your returns are not impacted by market performance and remain fixed throughout the FD tenure.
• Higher Interest Rates: FD interest rates are typically higher than general savings account rates.
• Payout Choice: You can choose from cumulative (payout at maturity) or non-cumulative (frequent interest payout) options.
• Safety: Bank FDs have DICGC insurance cover of up to Rs. 5 Lakhs (not for NBFCs), making them relatively safe investment options.

What are Bonds?

Bonds are a type of debt security that’s issued by governments, corporations, and municipalities to raise capital. When you invest in any type of bond, you are lending money to the issuer in exchange for periodic payments and the return of your principal at maturity. 

Key Features of Bonds

• Credit Ratings: Credit rating agencies like CRISIL and ICRA assess the financial strength of the issuer to assign credit ratings (AAA to D) to them. 
• Risk Level: Risks vary depending on credit ratings. A higher credit rating indicates a lower default possibility. Generally, government bonds are considered safer due to sovereign backing.
• Liquidity: You can sell the bond in the secondary market before the maturity date, but the price you’ll get depends on the prevailing interest rate.
• Interest Rate: Bonds may come with a fixed or floating coupon rate (unless they are zero coupon bonds). Interest rates on bonds depends on the credit rating and tenure of the bond. Higher-rated issuers offer lower interest rates, while lower-rated issuers may offer higher interest rates to compensate for higher possible default risk. 

Arbitrage Funds Vs. Fixed Deposits Vs. Bonds: A Quick Comparison

Now that you know the meaning of arbitrage funds, FDs, and bonds, let’s understand how these investment options compare. The following table sums up the arbitrage fund vs. FD vs. bonds comparison for you:

Which is Better For You in 2026: Arbitrage Fund Vs. FD Vs. Bonds

As such, there is no ‘better’ investment option that will suit all investors. The choice between arbitrage funds vs. FDs vs. bonds depends on your:

• Investment objective
• Risk appetite
• Tax bracket
• Investment horizon

Each of these investment options offers distinct advantages, making them suitable for different types of investors. That said, here are a few instances to map out their suitability to help decide between arbitrage funds vs. FDs vs. bonds:

If Safety and Predictability Are Your Top Priorities

In this case, you may choose bank FDs, which come with a Rs. 5 Lakh DICGC insurance cover per bank, per depositor. This cover keeps your capital safe, making FDs particularly appealing to retirees and conservative investors looking for capital preservation.

Government bonds are also good options since they come with sovereign backing. You may even consider AAA-rated corporate bonds since a high credit rating indicates lower default risk. 

If You Want Better Post-Tax Returns With Limited Risk

Arbitrage funds may be a good option in this case. They are taxed as equity funds, which means if you hold the units for more than a year before selling, your capital gains will be taxed at 12.5% (above Rs. 1.25 Lakhs/year). 

This can be beneficial for investors falling in a higher tax bracket (example: 30%), since FDs and unlisted bonds are taxed at slab rates.  

If Liquidity and Flexibility Are Important to You

Arbitrage funds may be considered since you can sell their units at any time. Exit load is applicable only if you sell before completing 30 days of allotment. 

Bonds also offer moderate liquidity, depending on the market volumes of the bond in the secondary market. But FDs may be a little trickier since they come with a premature withdrawal penalty of 0.5%-1% on the interest rate. 

If You are Looking For Regular Income

Bonds may be a suitable option here. Fixed coupon bonds that offer regular interest at a fixed rate can be good options for investors like retirees, who are looking for regular income. 

Non-cumulative FDs can also offer regular income. The benefit with a non-cumulative FD is that you can tailor the interest frequency on a monthly, quarterly, semi-annual, or annual basis, depending on your income needs.

So, Which One Should You Choose?

As mentioned earlier, choosing between arbitrage funds vs. FDs vs. bonds depends on your investment parameters. Rather than choosing one in 2026, you may consider a balanced approach:

• Using FDs for stability and capital preservation.
• Considering bonds for steady income.
• Allocating to arbitrage funds for tax-efficient growth.

If you’re a conservative investor who doesn’t want to tackle market volatility linked to equities, you can build a fixed-income portfolio with bonds and FDs available on GoldenPi. You will find a range of bank and NBFC FDs as well as bond collections to suit your investment needs.

Arbitrage Funds Vs. FD Vs. Bonds FAQs

1. What gives better returns in 2026: Arbitrage funds vs. FDs vs. bonds?

That depends on interest rate changes and market conditions. If the RBI cuts interest rates in 2026, FD rates may also fall, while bond prices could rise. That said, FD returns will stay fixed once you book your FD, and bond value fluctuation will impact you only if you choose to sell the bond before maturity. 

Similarly, arbitrage fund returns will depend on market volatility. Typically, periods of higher volatility increase arbitrage opportunities, potentially improving return potential.

2. How are arbitrage funds taxed as compared to FDs and bonds?

Arbitrage funds are taxed as equity mutual funds. This means:

• 12.5 LTCG tax if units are sold after 12 months (on gains above Rs. 1.25 Lakhs/year)
• 20% LTCG tax if units are sold before 12 months

Since FD interest is added to your income and taxed at slab rates, arbitrage funds may offer better post-tax returns for investors in higher tax brackets.

3. Are arbitrage funds safer than bonds?

No. Fixed deposits, especially bank FDs, are one of the safest investment options. Bank FDs are protected under the DICGC insurance cover up to Rs. 5 Lakhs per depositor, per bank. This means, even if the bank goes bankrupt, your investment up to the set limit will be repaid.

Arbitrage funds are susceptible to market volatility like other equity-oriented funds (even though they are well hedged). This means that capital preservation is not guaranteed.

4. Which investment is best for retirees?

Retirees may prefer safer options like FDs and government bonds for capital safety and regular income.

Disclaimer:

This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.

Fixed Deposit schemes are regulated by the Reserve Bank of India. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.