Investors can consider income plus arbitrage funds as an attractive avenue to park their short-to medium-term surplus. These funds combine stable accrual and tax efficiency, making them a smart alternative to traditional debt allocations.
Income plus arbitrage funds allocate just under 65% to high-quality debt instruments such as corporate bonds, government securities, and money market instruments. The rest is invested in equity arbitrage strategies, where fund managers exploit short-term price differences between cash and futures markets to generate additional yield.
The structure qualifies for equity taxation benefits while maintaining low volatility. Long-term capital gains are taxed at 12.5% as compared to tax at marginal rate for other debt instruments. With debt funds losing indexation benefits, this structure offers one of the few efficient income options for high-tax-bracket investors.
The three-year returns of top five funds range between 8 to 14% and for one-year between 7.5 to 13%, because of high short-term rates and attractive arbitrage spreads. These funds are best suited for investors with a 2–3-year investment horizon to get the best of its tax efficiency against traditional instruments.
Nirav Karkera, head, Research, Fisdom, says with equity valuations at elevated levels and a strong commodities rally over the past year, many high-networth individuals are booking profits from risk assets and redeploying gains into income plus arbitrage funds. “This not only helps them preserve capital but also enhances the overall efficiency of their debt allocation,” he says.
Better liquidity
These funds provide daily liquidity with T+1 redemption timelines. Investors are taxed only when they redeem their units, making the portfolio rebalancing seamless and tax-efficient. “The underlying portfolios remain highly liquid, allowing investors to access funds quickly without significant mark-to-market risk,” says Sonam Srivastava, founder, Wright Research PMS.
Risk & return
Returns depend on the manager’s skill in shifting between arbitrage and debt based on market conditions. Arbitrage opportunities vary with market volatility—narrow spreads can limit returns.
\Aditya Agarwal, co-founder, Wealthy.in, a wealth-tech platform, says these funds are ideal for conservative investors seeking steady, moderate returns. “While arbitrage strategies reduce equity risk, returns can fluctuate with debt yields and market opportunities,” he says.
What to watch out for
Before investing, individuals must assess the interest rate environment that influences the debt portion of the portfolio. Rising rates may cause short-term mark-to-market fluctuations, while stable or falling yields tend to favour consistent accrual.