Why Income Plus Arbitrage Passive FoFs Might be the Missing Piece of Your Portfolio Puzzle

Income Plus Arbitrage Passive FoFs are a unique investment product suitable for many types of investors. This category offers a relatively lower risk profile while also being tax-efficient.

This favourable combination is possible because it invests in debt mutual fund schemes and arbitrage funds while being taxed as an equity-oriented fund.

In this article, we cover everything you need to know about Income Plus Arbitrage Passive FoFs and help you decide whether it’s a suitable investment for your portfolio. Key Characteristics of an Income Plus Arbitrage Passive FoF
An Income Plus Arbitrage Passive FoF, as the name suggests, is a fund of funds. This means that the fund invests in other mutual funds. There are two types of funds where it invests—fixed-income funds (also known as debt mutual funds) and arbitrage funds.
• Lower Risk Profile – The risk profile of the FoF is relatively lower as it invests in debt mutual funds investing pre-dominantly in government securities and AAA rated corporate bonds. Further, the FoF invests in arbitrage funds, which also have a relatively low risk profile.
• Higher Tax Efficiency – The FoF offers higher tax efficiency because at least 35% of the corpus of the fund is invested in arbitrage funds. This means that the fund will not be taxed as a “debt-oriented fund.” An Income Plus Arbitrage Passive FoF is subject to 12.5% tax if the investment is held for a period of more than two years or the applicable income tax slab rate of the investor if the investment is held for a shorter period.

Why Invest in an Income Plus Arbitrage Passive FoF?
The FoF seeks to invest in passive strategies. Further, passive funds replicate an index and follow a rule-based methodology, which increases transparency. Here are some of the key advantages of investing in an Income Plus Arbitrage Passive FoF:
• Aims for relatively Stable Returns – The FoF aims to deliver relatively stable returns by investing in passive fixed-income mutual funds following a roll down strategy and arbitrage opportunities.
• High Liquidity – The FoF can offer high degrees of liquidity by allowing for quick redemptions. Investors may be able to liquidate their investment in T+2 days, which provides high flexibility to investors. Further, the FoF may charge a nominal exit load or zero exit load, which can enable redemptions without any significant financial penalty, improving the liquidity of the investment.

Who can Invest in Income Plus Arbitrage FoFs?
Investors looking for debt-like returns while being subject to equity-like taxation. This means that the FoF has a unique value proposition that can be attractive to many types of investors.
• Investors in Higher Tax Brackets – Investors who are in higher tax brackets may be looking for an investment product that lowers their tax burden. Most fixed-income products are taxed at the applicable slab rate of the investor, which can mean that potential returns are significantly lower. Hence, choosing this FoF can lower the tax burden to 12.5% if held for a period of more than 24 months.
• Risk-Averse Investors – Investors who are looking for an investment alternative which has a relatively lower risk profile may benefit from investing in this type of FoF. Investors can balance their other high-risk, high-reward investments with this FoF, which provides relative stability. Hence, this type of FoF can work as a complement to other types of investments and create an optimal portfolio for both retail and institutional investors.

Wrapping Up
Overall, the Income Plus Arbitrage Passive FoF category of mutual funds has a lot to offer. As underlying debt schemes are passive in nature, the cost of investment for investors may also be low. This type of FoF invests in both debt instruments and arbitrage opportunities and combines the benefits of both in a single product.

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Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Axis MF/AMC is not guaranteeing/assuring any returns on investments. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.
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Investors shall be bearing the recurring expenses of the scheme, in addition to the expenses of other schemes in which the Fund of Funds Scheme makes investments.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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