Arbitrage fund strategy — should we hold very long term or redeem + reinvest every year?

Taxation
1

As part of our portfolio, we keep a decent chunk in arbitrage funds.

Main reason for this are:

  1. better post-tax return compared to FD (assuming holding for a year)
  2. better liquidity (some long-term FD’s are locked in)

I always wonder if we should we hold very long term or redeem + reinvest every year?

To illustrate with example, say we have 1Cr to be parked in an arbitrage fund for 5 years?

Approach A — invest and redeem after 5 years. No capital gains booked in intermediate years.

Approach B — invest and redeem after year 1. Reinvest and redeem after year 2. Repeat.

If 1L LTCG exemption limit is to be ignored, which approach works better?

I find Approach B tedious and incurs more STT even though it’s 0.001%. Plus redeem + reinvest often takes funds out for 5–7 days.

Is there anything else that would make one approach better than the other?

2

Why are you redeeming and investing immediately? What is the idea behind it, since you ignored the 1L LTCG exception?

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