Debt Mutual Funds Turn into Debt-Plus-Arbitrage FoFs
Why in the news
Fund houses are repackaging existing debt schemes as Fund of Funds (FoFs) to use tax benefits announced in the previous Budget. The new schemes hold both bonds and arbitrage positions.
Key facts
- Allocation: slightly under 65% in fixed income; the balance in arbitrage (buying and selling shares and futures together to capture price gaps).
- Tax: gains held over 24 months face 12.5% LTCG; pure debt schemes are taxed at the investor’s slab, up to 30% for high earners and companies.
- Cost: a double layer of expenses (the FoF plus underlying funds) makes them dearer than ordinary debt products.
| Renamed as | Earlier scheme |
|---|---|
| ABSL Debt Plus Arbitrage FoF | ABSL Active Debt Multi Manager FoF |
| Axis Income Advantage Fund of Funds | Axis All Seasons Debt Fund of Funds |
| Kotak Income Plus Arbitrage FoF | Kotak All Weather Debt FoF |
| Bandhan Income Plus Arbitrage Fund of Fund | Bandhan All Seasons Bond Fund |
Approach and views
- Kotak, Aditya Birla and Bandhan mainly use their own fund house’s debt schemes; Axis invests across several AMCs.
- Deepak Agrawal (Kotak): the blend may give better post-tax returns than pure debt and could beat pure arbitrage funds over 2-3 years.
- Devang Shah (Axis): dynamic allocation across bond durations; currently high duration, expecting rate cuts.
Exam angle
- Arbitrage: exploiting price differences between shares and futures.
- LTCG rate mentioned: 12.5% after 24 months.