2 weeks ago
Income Plus Arbitrage Funds Offer Tax-Efficient Returns Amid Volatility
These funds combine two ways of trying to earn money.
One part invests in debt and can benefit from interest income or falling yields.
The other part looks for small price differences between shares and their futures contracts.
This second part usually does not depend heavily on whether share prices rise or fall.
The funds may work better when markets are unsettled because price differences can become larger.
If investors stay invested for more than two years, their gains may receive a lower long-term capital-gains tax rate.
However, the funds can still have short-term losses.
People who may need their money soon may be better served by liquid or overnight funds.
Income plus arbitrage funds combine debt investments with arbitrage strategies, typically allocating 35–65% to arbitrage.
The debt component seeks accrual income and potential gains if bond yields decline.
Arbitrage strategies target cash-futures price differences while limiting directional equity exposure.
The funds may offer tax advantages after a holding period exceeding 24 months.
They may suit investors with a two-year horizon, but not those needing emergency or overnight liquidity.
- Who
- Investors, fund managers, and wealth advisers discussing income plus arbitrage funds.
- What
- The funds combine debt and arbitrage investments to seek income, relatively low volatility, and potentially better post-tax returns.
- Where
- The article does not specify a geographic location.
- When
- The article compares one-, two-, and three-year returns and focuses on holding periods longer than 24 months.
- Why
- Elevated bond yields, volatile equities, and the potential for tax-efficient returns make the strategy relevant for some investors.
Potential benefits
Risks and limitations
Post-tax returns
Potential benefits
Investors in higher tax brackets may benefit from the 12.5% long-term capital-gains rate after more than 24 months, potentially improving post-tax returns compared with liquid funds taxed at slab rates.
Risks and limitations
The tax advantage depends on holding the investment beyond 24 months, and the fund’s returns can be reduced by expenses, exit loads, or weaker performance.
Role in short-term allocations
Potential benefits
The combination of debt accrual, possible gains from falling yields, and arbitrage income can provide an alternative to traditional short-term debt allocations.
Risks and limitations
These funds are not substitutes for emergency money or overnight liquidity, and short-term negative returns remain possible.
Portfolio management
Potential benefits
Combining two return sources may help the fund perform across different market conditions, including periods of higher equity volatility.
Risks and limitations
Incorrect duration calls, compressed arbitrage spreads, or poorly timed allocation changes can reduce returns; investors must assess the manager’s process and track record.
Key facts
- Typical allocation
- About 35–65% in arbitrage funds, with the balance in debt funds.
- Tax treatment
- Gains held for more than 24 months are described as subject to 12.5% long-term capital-gains tax.
- Average one-year return
- 5.7% for income plus arbitrage funds versus 6.4% for liquid funds.
- Average two-year return
- 6.2% versus 6.7% for liquid funds.
- Average three-year return
- 8.5% versus 6.9% for liquid funds.
- Potential risks
- Duration mistakes, narrower arbitrage spreads, allocation-timing errors, expenses, exit loads, and short-term negative returns.
- Suggested horizon
- The strategy is presented as more suitable for investors able to remain invested for over two years.
Quotes
Sonam Srivastava
Founder of Wright Research PMS
“For investors with a horizon of over two years, the combination of return potential and tax efficiency can make them an attractive alternative to traditional short-duration debt allocations.”
financialexpress.com
“I see this as a good parking spot if you have a 24-month runway. If you need the money in a few months, liquid or overnight funds are still the safer bet.”
financialexpress.com
Sources
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