Income plus arbitrage FOF- The Quiet Strategy That Makes More Sense Than It Sounds!

Most investors don’t lose money because they choose the wrong product. They lose because they choose a product without understanding what problem it’s solving.

Think about this: You have ₹10 lakh. You want something safe. You don’t want drama. The obvious choice? A fixed deposit. It’s simple, predictable, and feels secure.

But here’s the catch—security and efficiency are not the same thing.

What Changed?

For years, debt mutual funds had a tax perk: hold for three years, and you paid 20% tax with indexation—a nice little boost over fixed deposits. That’s gone now. Today, all gains on debt funds, no matter how long you hold them, are taxed at your income slab.

If you’re in the 30% bracket, that’s a big bite. Your 7% return? It’s suddenly closer to 4.9% after tax.

When rules change, strategies need to change too. Which is why something called an Income Plus Arbitrage Fund of Funds (FoF) exists.

What Is It?

Strip away the jargon and here’s the essence:

• It’s a hybrid structure.

• At least 35% in arbitrage funds (those equity-based strategies that lock in tiny, almost risk-free gains by exploiting price differences).

• Up to 65% in debt funds for stability.

• Why this odd mix? Because with more than 35% in equity (even if hedged), the fund qualifies for equity-like taxation. That means:

  • l Hold it for 2 years, and you pay 12.5% tax on gains (no indexation).

  • l Sell earlier? Then it’s taxed at your slab.

The magic here is not in the returns themselves—they’re modest. The magic is in the after-tax math.

The Numbers Tell the Story

Let’s compare ₹10 lakh invested in two places for 3 years:

Investment Avenue	Return % (Approx.)	Post-Tax Returns (STCG)	Post-Tax Returns (LTCG)
Fixed Deposit	7.50%	5.63%	5.63%
Income Plus Arbitrage FoF	6.90%	5.52%	6.00%

On the surface, FD looks better at 7.5% vs 6.9%. But after 2 years, if you’re in a 30% tax bracket, FD bleeds to 5.63%, while the FoF stays at 6.00%.

That difference compounds quietly. Over ₹10 lakh, the gap is not life-changing, but it’s rational. And rational decisions add up over decades.

Who Is It For?

• People in high tax brackets (30% or more).

• Investors who can stay put for at least 2 years.

• Those who want low drama—not equity risk, not wild swings.

• Not for those chasing thrill or 12% returns. This is boring money done smartly.

  
  

Why It Works

The best financial strategies aren’t the ones that make you rich overnight. They’re the ones that keep you efficient, calm, and consistent—especially when the rules change.

This is not a product for everyone. It’s a solution for a very specific problem: how to earn safe returns without giving away too much in taxes.

If that’s your problem, this might be your answer.

Our Perspective

Income Plus Arbitrage FoFs present a compelling case for short to medium-term investors in higher tax slabs. While the tax advantage is significant, investors must be aware that: - These are new offerings with limited track record - Their returns are modest and depend heavily on the arbitrage-debt mix - Monitoring expense ratios and fund manager discretion is essential

We recommend considering a limited allocation to these funds as part of a diversified portfolio strategy.

For further clarity or personalised advice, please contact your MyAnmol advisor to assess which FoF aligns with your financial goals and tax profile.