Why income plus arbitrage funds are gaining popularity
💡 Income Plus Arbitrage Funds: A Smart and Tax-Efficient Alternative to Traditional Debt Funds
After the 2023 Union Budget, investors have started looking beyond traditional debt mutual funds. The tax changes have made debt funds less attractive, and fund houses are now launching income plus arbitrage funds to meet the growing demand for tax-friendly, low-risk investment options. 📉➡️📊
❓ Why the Sudden Shift?
The 2023 Budget brought a major change: returns from debt mutual funds are now taxed at your income tax slab rate, which could be as high as 30% 💸. Earlier, investors used to get indexation benefits on long-term gains, which helped reduce tax. That advantage is now gone. ❌
On the other hand, Fund of Funds (FoFs) — such as income plus arbitrage funds — offer long-term capital gains tax at just 12.5% if held for over two years ✅. But to get this benefit, these funds should not hold more than 65% in debt instruments.
So, to take advantage of this, fund houses began launching new FoFs or restructuring their existing funds and ensured they stayed below the 65% debt cap by adding arbitrage exposure. ⚖️
📊 For example, on a ₹5 lakh gain:
- A traditional debt fund (taxed at the highest 30%) would cost you ₹1,50,000 in tax ❌
- An income plus arbitrage fund (taxed at 12.5%) would cost just ₹62,500 ✅
💰 That's a 60% tax saving!
This tax advantage is one of the key reasons why more investors are turning to this category 🧠💼.
📘 What Are Income Plus Arbitrage Funds?
The Income Plus Arbitrage Active FoF is structured such that up to 65% investments are in the underlying debt-oriented scheme, and the balanced investment is in arbitrage schemes.
It invests in Debt and Arbitrage funds only, helping add potential stability and providing equity-like taxation with debt-like predictability 📈⚖️.
This allows investors with a holding period of at least two years to benefit from a lower tax rate of 12.5% compared to the higher slab rate applied to debt mutual funds 🏦.
🔁 In arbitrage, the fund buys a stock in the cash market and sells the same in the futures market. The price difference is captured at expiry — offering low-risk, market-neutral returns.
The debt portion provides stable and predictable income, making the overall fund less volatile 📉➡️📈.
📈 Rising Popularity
Many fund houses have either repackaged their old debt schemes into income plus arbitrage funds or launched new ones.
According to data from ACE MF, the assets under management (AUM) in this category have grown from ₹743 crore in April 2023 to ₹3,161 crore by April 2025 🚀 — a sharp rise in just two years.
🌟 What Makes These Funds Attractive?
- Better Post-Tax Returns – Gains are taxed at just 12.5% after 2 years, while debt funds are taxed at slab rates — up to 30% for many investors.
- No Tax on Internal Switching – Fund managers can move money between debt and arbitrage segments without creating a taxable event for the investor.
- Lower Risk – Compared to equity funds, these funds carry moderate risk, suitable for conservative investors.
- Dynamic Allocation – Fund managers can adjust the mix between arbitrage and debt based on market trends, interest rate outlook, and arbitrage spreads.
- More Predictable Returns – These funds aim to give higher returns than pure arbitrage funds while keeping volatility low — making them a middle ground between liquid, arbitrage, and short-term debt funds.
🔄 Are They a Replacement for Debt Funds?
While income plus arbitrage funds offer several advantages, they may not fully replace traditional debt funds for everyone.
The structure is slightly more complex, and returns depend on the availability of arbitrage opportunities and the health of the debt market ⚠️.
"For investors seeking tax-efficient, low-risk options — especially for medium-term goals of 1 to 3 years — income plus arbitrage funds offer an attractive alternative to traditional debt instruments."
✅ Final Thoughts
Income Plus Arbitrage Funds are becoming a popular choice for investors who want stability, low risk, and better post-tax returns 💹.
With debt funds losing their tax edge, these hybrid funds offer a smart, balanced solution — ideal for today’s changing investment environment 🔄.
📆 If you're looking to invest for medium-term goals of 1 to 3 years and want a more efficient way to grow your money without high risk, this category is definitely worth considering.
🔒 Disclaimer:
Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. Past performance is not indicative of future results. The returns mentioned are for illustrative purposes only and not guaranteed. Consult your financial advisor for personalized guidance.
