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What is the Income Plus Arbitrage Fund of Funds?

What is the Income Plus Arbitrage Fund of Funds?

When you’re looking for ways to grow your money without taking too much risk, most people turn to fixed deposits or debt mutual funds. But what if there was a way to get a bit more from your investments without stepping too far into riskier options? That’s where the Income Plus Arbitrage Fund of Funds (FoFs) come in. These funds are designed for investors who want a little more than traditional debt returns but still want to avoid the ups and downs of the stock market. To know more about these schemes, keep reading.

What is the Income Plus Arbitrage Fund?

The Income Plus Arbitrage Fund of Funds is an open-ended scheme designed to generate regular income and capital appreciation by combining fixed income with arbitrage mutual fund schemes. These funds don’t invest directly in stocks or bonds. Instead, they invest in other mutual fund schemes, mainly debt and arbitrage funds.

Presently, as we write, there are a total of 11 funds in this category. Either the AMC has restructured an old fund into an Income Plus Arbitrage Fund of Funds, or they have launched a new fund.

Key features of the Income Plus Arbitrage Fund

Below are some unique characteristics of these funds.

  1. Diversified investment approach

These FoFs invest in a combination of debt instruments like treasury bills, bonds, and equity arbitrage mutual funds. This helps keep returns steady and risk levels low.

  1. Expense limit

The maximum Total Expense Ratio (TER) for these schemes is fixed at 2%, which limits how much investors are charged for fund management.

  1. Set asset allocation guidelines

The allocation to debt-based assets will not exceed 65% of the total assets, while at least 35% will be invested in arbitrage-based equity mutual funds at all times.

  1. Reduced equity risk and volatility

Despite including equity, the use of arbitrage minimizes the risks from market fluctuations by capitalizing on price differences rather than predicting market movements.

How does the Income Plus Arbitrage Fund work?

An Income Plus Arbitrage Fund is a hybrid mutual fund that aims to provide a stable income with lower risk. It primarily invests in debt instruments, such as bonds, government securities, and money market instruments, to earn regular interest income. A small portion of the fund is also invested in arbitrage opportunities in the equity market.

Arbitrage refers to buying shares in the cash market and selling the same shares in the futures market at a higher price. The price difference helps generate extra returns with very low risk. Since both buying and selling happen simultaneously, the impact of market movement is minimal.

The fund combines debt income and arbitrage gains to offer better returns than pure debt funds. It also maintains a relatively lower risk. Investors looking for steady returns with moderate risk should consider investing in the fund.

Advantages and risks of Income Plus Arbitrage Fund of Funds

Income Plus Arbitrage Fund of Funds has both advantages and risks. Here’s a look at each of them to help you make an informed financial decision.

Advantages:

  • It provides relatively stable returns by investing in debt and low-risk arbitrage strategies.
  • It helps reduce market risk because arbitrage profits don’t rely on market direction.
  • It offers better return potential than traditional debt funds in stable market conditions.
  • It is suitable for investors seeking regular income with moderate risk.

Risks:

  • Returns may be lower during periods when arbitrage opportunities are limited.
  • It is not entirely risk-free as debt investments carry interest rates and credit risk.
  • Expenses may be higher since it is an FoF structure.
  • It may not be suitable for investors seeking very high returns.

How are income plus arbitrage FoFs taxed?

With effect from 1st April 2025, Income Plus Arbitrage Fund taxation will be as follows:

  • Capital gains from these FoFs will be considered long-term if held for more than 24 months and will be taxed at 12.5%.
  • Short-term gains will apply if the funds are held for less than 24 months and will be taxed according to the investor’s income tax slab.

One key difference between pure debt mutual funds and Income Plus Arbitrage FoFs is that debt funds are taxed at slab rates, regardless of the holding period.

Lock-in period & exit load details for arbitrage funds

Generally, arbitrage funds do not have a mandatory lock-in period. This means investors are free to withdraw money at any time based on their requirements. However, many arbitrage funds charge an exit load. This is to discourage very short-term withdrawals. So, if you redeem your investment within 30 to 90 days, you may be charged an exit load ranging from 0.25% to 1%. Fortunately, there is no exit load for holding periods greater than 90 days.

Who should invest in an Income Plus Arbitrage Fund of Funds?

Income Plus Arbitrage Fund of Funds is suitable for investors seeking stable returns with lower risk. Those who should invest in the fund include:

  • Investors seeking better returns than fixed deposits with controlled risk
  • Conservative or moderate investors who prefer income-focused investments
  • Investors with a short- to medium-term investment horizon
  • Those looking to reduce market volatility in their portfolio

Overall, this fund is suitable for those desiring steady growth without taking high equity risk.

How to invest in an Income Plus Arbitrage FOF in India?

To invest in an Income Plus Arbitrage FOF in India, here are the steps to follow:

  1. Identify a mutual fund house offering an Income Plus Arbitrage FOF.
  2. Complete your KYC through a bank, mutual fund website, or investment app.
  3. Decide whether to invest through a lump sum or SIP.
  4. Select the fund based on risk level, expense ratio, and past performance.
  5. Invest online through mutual fund platforms, AMC websites, or a financial advisor.

Remember to review your investment regularly to ensure that it aligns with your financial goals.

Conclusion

Income Plus Arbitrage Fund of Funds offers a fresh option for investors who want better-than-debt returns with limited exposure to equity risks. With a fixed structure and tax benefits for long-term holding, these funds can be suitable for conservative investors looking to improve their portfolio mix and maintain a long investment horizon of at least 2 years.

If you’re planning to explore such investment options, Tata Capital Wealth can guide you with strategies that match your financial objectives and risk appetite. With access to mutual funds, bonds, real estate, and more, Tata Capital Wealth helps you build a strong foundation for your future.

Visit our website today and plan your future with peace of mind!

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FAQs

Should I invest in an Income Plus Arbitrage Fund of Funds for the long-term?

The Income Plus Arbitrage FOFs is designed for short to medium-term returns, so it may not be ideal for those looking for long-term investment options.

Is Income Plus Arbitrage Fund of Funds a diverse investment option?

While this fund helps diversify debt investments, it may not offer sufficient diversification across different asset classes for a well-rounded portfolio.

What is an Income Plus Arbitrage Fund of Funds?

It is a fund that invests in debt funds for income and arbitrage funds for low-risk equity gains. The aim is to provide stable returns with lower volatility.

How is income from an arbitrage fund taxed in India?

In India, arbitrage fund taxation is like that of equity funds. If you sell arbitrage fund units within 12 months, taxes apply at 20% on short-term capital gains. If you don’t sell units for more than 12 months, taxes apply at 12.5% without indexation on gains above the annual exemption limit (about Rs. 1.25 lakh).

What is the holding period for long-term capital gains in arbitrage funds?

The holding period for long-term capital gains in arbitrage funds is more than one year.

Are Income Plus Arbitrage Funds safer than equity mutual funds?

Yes, they are generally safer than pure equity funds because they invest largely in debt and low-risk arbitrage strategies, reducing market risk.

Can SIP be started in the Income Plus Arbitrage Fund of Funds?

Yes, investors can start an SIP in an Income Plus Arbitrage Fund of Funds. The facility makes it easy to invest regularly in small amounts.

Who should consider investing in the Income Plus Arbitrage Fund of Funds?

Conservative and moderate investors seeking steady income, lower risk, and better returns than fixed deposits should consider these funds.

How are returns generated in an Income Plus Arbitrage FOF?

Returns come from interest earned on debt investments and price differences captured through arbitrage opportunities in equity markets.

Should I invest in an Income Plus Arbitrage Fund of Funds for the long-term?

The Income Plus Arbitrage FOF is designed for short to medium-term returns, so it may not be ideal for those looking for long-term investment options.

Is Income Plus Arbitrage Fund of Funds a diverse investment option?

While this fund helps diversify debt investments, it may not offer sufficient diversification across different asset classes for a well-rounded portfolio.

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