Introducing Cash Management smallcases by Windmill Capital

Most investors think carefully about where to deploy long-term money. The question of where to park short-term surplus funds sitting idle for a day, a week, or several months before being used or redeployed gets far less attention. A savings account is the default, almost out of habit.

Windmill Capital’s Cash Management smallcases are a structured alternative to that default. There are five smallcases in this category, covering horizons from one day to one year. These smallcases are designed to offer higher returns than the bank deposits of similar tenure while ensuring your capital is at least risk. The selection of the right smallcase depends on just two questions: how long the money is being parked, and, for the longer end of the range, what is your income tax bracket.

Why a basket, not a single fund?

Even within low-risk categories, individual funds can carry concentration in specific issuers, show subtle style drift, or undergo operational changes that past performance will not flag immediately. Holding a small basket of 3 to 4 funds across fund houses reduces dependence on any single AMC’s credit judgment or operational quality.

More importantly, Windmill’s selection process identifies funds with the most stable and predictable return profiles within each category and rotates away from funds where that stability deteriorates. A single fund offers no such flexibility.

The four horizons

How funds are selected

The universe for each smallcase begins with all funds in the relevant category, overnight, liquid, money market, ultra short duration, or arbitrage available in direct plan and growth option, with at least three years of performance history.

Each fund is evaluated across multiple performance and risk indicators, distilled into two broad categories: factors that strengthen return prediction, and factors that identify outlier behaviour. This quantitative screen is followed by a qualitative review of each fund’s current portfolio, examining tilt toward high-grade and sovereign securities, and any behavioural shifts that return history may not immediately surface. Funds clearing both layers are selected into the equally weighted portfolio.

Why your tax bracket matters at the one-year horizon

For the first three smallcases, tax bracket is not a factor in the decision; the fund type is the same for all investors. At the six-to-twelve-month horizon, it becomes the deciding variable.

The reason is straightforward. Ultra-short-duration funds are classified as debt funds by the Indian tax code, which means gains are taxed at your marginal slab rate regardless of holding period. Arbitrage funds, because they maintain more than 65% of assets in equity-related instruments, are classified as equity funds with short-term capital gains taxed at a flat 20% and long-term gains at 12.5%.

For an investor in the 30% bracket, this creates a meaningful difference in what they actually keep:

Tax comparison: ₹1 lakh invested for 6–12 months

The arbitrage fund delivers a better post-tax outcome despite earning more or less similar returns. For an investor in the 20% bracket or below, the situation reverses; the debt fund’s slab-rate tax is low enough that the simplicity of an ultra-short-duration fund makes it the better choice.

 For shorter investment horizons of less than 6 months, arbitrage funds can exhibit intermittent volatility and, at times, significantly underperform debt funds. However, over slightly longer holding periods, this performance gap tends to normalise.

Given this, for very short durations (1 week to 6 months), we have not created a separate offering for investors in higher tax brackets (>=25%), as data suggests that debt funds remain a more suitable option for parking short-term surplus, irrespective of tax bracket.

Rebalancing policy

Rebalancing is trigger-based rather than calendar-driven. Changes are recommended when a fund’s relative risk profile shifts materially against its peers, or when changes in fund management style, investment policy, or fund manager introduce uncertainty. Churn is deliberately kept low in these categories; unnecessary switching creates tax events that directly reduce net returns.

These smallcases are not designed to generate wealth. They are designed to ensure that money set aside for days, weeks, or months is not sitting idle, earning sub-optimal returns.

About each smallcase

Each smallcase is designed to offer higher returns than the bank deposits of similar tenure while protecting the wealth of the investors for the specified tenure. We have done a detailed analysis and backtest to ensure that the type of funds and individual funds selected for each of the smallcase offer the best risk-adjusted returns for that time period

Park Cash – 1 Week: Overnight mutual funds invest exclusively in securities that mature the following day, meaning capital is deployed and returned within a single 24-hour cycle. This structure leaves virtually no window for interest rate movements or credit events to cause damage. Overnight funds are the only mutual fund category where the probability of negative daily returns is effectively zero. The portfolio targets returns above savings accounts.

Park Cash – 3 Months: Liquid mutual funds invest in money market securities with maturities capped at 91 days. The slightly extended horizon allows marginally more movement in interest rates and credit quality compared to overnight funds, though well within limits that could threaten capital. Windmill Capital’s research indicates no instance of negative returns over any holding period exceeding one week in the last three years for this category. The portfolio targets returns above bank deposits of similar maturity.

Park Cash – 6 Months: Holds a portfolio of money market mutual funds, schemes that invest in short-term money market securities with maturities up to one year. The longer maturity window, relative to liquid funds, allows interest rates and credit quality more room to shift while keeping the focus firmly on capital preservation. The return potential is correspondingly higher than overnight or liquid funds, again targeting returns above comparable bank deposits.

Park Cash – 1 Year: This smallcase holds a portfolio of ultra short duration funds, schemes that invest in fixed income securities with an overall portfolio Macaulay duration of three to six months. The focus is capital preservation and high liquidity, with returns targeting above bank deposits of similar maturity. This smallcase is suited to investors in the 20% tax bracket and below.

Park Cash – 1 Year (Tax-Smart): Arbitrage funds generate returns differently from the other four: by capturing price differentials between the cash and futures markets, with a portion allocated to debt and money market instruments. This mechanism produces relatively stable, low-volatility returns and because arbitrage funds are classified as equity funds for tax purposes, investors in the 25% bracket and above retain meaningfully more of those returns after tax.

In all five smallcases, holdings are mutual fund units held directly in your account, not a fund of funds. Each portfolio holds 3 funds, equally weighted across fund houses.

Liquidity and instant redemption

One of the most common reasons investors default to a savings account is the fear of not being able to access money quickly when needed. For Park Cash – 1 Week and Park Cash – 3 Months, this concern is largely addressed by the instant redemption facility that SEBI mandates for overnight and liquid funds.

Each AMC offers instant redemption of up to ₹50,000 per day. Investing across three fund houses, which is what these smallcases do, gives access to up to ₹1.5 lakh in immediate withdrawals, credited to your bank account within minutes. For most short-term cash management needs, this is sufficient liquidity.

Please note: Currently, the smallcase platform doesn’t support an instant redemption facility for all the schemes included in these portfolios, and investors might need to place orders directly from the AMC website for instant redemption, rather than getting the funds in 1-2 days.

_{Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of a SEBI recognized supervisory body (if any) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.}

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_{Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.}