Income Plus Arbitrage Funds

DEBT mutual funds in India, which were a tax-efficient option for lower-risk investors in the Indian capital market, took a beating when its taxation got tweaked in a recent Union Budget whereby its gains were taxed at the investor's overall income tax slab rate.

- ASHOK KUMAR

There was a course correction of sorts in the very next Budget where some further tweaks were made for a new debt-oriented hybrid investment category with an equity taxation rate albeit with a two-year holding period was proposed.

This has led to some innovative products and the Income Plus Arbitrage Fund, which allocates investments into a combination of debt-oriented MF schemes and arbitrage funds, is one of them. Typically, such a fund invests about 50-65% in debt MFs and 35-50% in arbitrage opportunities, placing it in Fund-of-Funds (FoF) category. The debt component is aimed at offering stability and visible income, while arbitrage portion offers tax efficiency. With precise structuring, the fund can qualify for equity-like taxation, making it an attractive option for tax-sensitive investors.