As tax rules change, AMCS develop innovative ideas to attract customers. The latest move is creating a new type of fund of funds (FOF), an MF that invests in other MFs (from the same or different AMCs).
Since debt mutual fund capital gains are always taxed at the slab rate, this new FOF creates a “hybrid” taxed at a lower rate, regardless of duration. The FOF will hold not more than 65% Debt Mutual fund schemes and not less than 35% Arbitrage Schemes.
This way, the fund will be neither equity nor debt-oriented. The taxation will be per the slab for gains from units less than or equal to two years old. For gains from older units, it will be a 12.5% LTCG tax. See more details here: How will fund of funds be taxed from July 23rd 2024?
The question now is, should I prefer the Income Plus Arbitrage Fund of Funds instead of debt funds? The short answer is no for most investors, especially those inexperienced with debt funds. This is because the risk is higher, and we should never increase risk in the name of saving tax.
Our recommendation is also valid for those who wish to switch from Parag Parikh Conservative Hybrid Fund to the “debt-heavy” Parag Parikh Dynamic Asset Allocation Fund, as the risk is significantly higher. Such a move is ‘ok’ for experienced investors, but the risk is higher. Ps. I have made this switch, but I am aware of the risk, and more importantly, the risk is acceptable for my goal.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Want to create a complete financial plan? Learn goal-based investing? Exclusive access to our DIY tools? Increase your income with your skills? Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Why am I not a fan of Income Plus Arbitrage Fund of Funds?
- Any fund of funds is problematic. The underlying funds keep changing, and the risks also vary. The underlying funds themselves change strategy from time to time.
- In addition, the debt FOF may become a dynamic bond fund, changing underlying funds based on interest rate movements and the credit rating profile based on market conditions.
Is it necessary to get into such complexity only to save some tax? It makes no sense to us.
Let us see some examples.
Axis Income Plus Arbitrage Active FOF says, “invests in a variety of debt-oriented mutual fund schemes of different AMCs through a single fund. The fund actively manoeuvres duration and credit based on the prevailing market environment”
This is its portfolio as of April-end 2025.
Top 10 Issuers | % Of Net Assets |
Axis Corporate Bond Fund – Direct Plan – Growth Option | 18.33 |
Kotak Equity Arbitrage Fund – Direct Plan – Growth Option | 17.66 |
Bandhan Arbitrage Fund – Direct Plan – Growth Option | 14.2 |
Nippon India Corporate Bond Fund – Direct Plan – Growth Option | 10.84 |
Axis Overnight Fund – Direct Plan – Growth Option | 10.84 |
Axis Arbitrage Fund – Direct Plan – Growth Option | 6.41 |
Axis Long Duration Fund – Direct Plan – Growth Option | 6.15 |
Axis Ultra Short Duration Term Fund – Direct Plan – Growth Option | 3.46 |
SBI Magnum Constant Maturity Fund – Direct Plan – Growth Option | 3.29 |
Bandhan Gov Securities Fund- Constant Mat – Direct Plan – Growth Option | 3.04 |
I have to worry about what the fund manager is doing, and then I have to worry about what the fund managers of the underlying funds are doing. Sorry, too much trouble. No, thank you.
SBI Income Plus Arbitrage Active FOF says, “Investments in actively managed debt-oriented schemes will be based on an evaluation of macroeconomic factors, policy rates, liquidity expectations, and demand-supply dynamics, enabling active management of credit risk and interest rates, as well as their likely evolution over the medium term” The fund is just a few days old and underlying fund information is unknown.
HDFC Income Plus Arbitrage Active FOF says, “Scheme will actively manage allocation by adjusting the portfolio duration and credit risk based on the interest rate outlook, decisions made during RBI monetary policy, shape of the yield curve, and other factors as deemed suitable by the Fund Manager”
The fund currently holds
HDFC Corporate Bond Fund – Growth Option – Direct Plan 62.85%
HDFC ARBITRAGE FUND – Direct Plan – Wholesale Growth Option 36.66%
Before you think, “Two funds are not bad, ” I want to remind you that things change fast.
DSP Income Plus Arbitrage FoF
DSP Arbitrage Fund(G)-Direct Plan 35.9867%
DSP Banking & PSU Debt Fund(G)-Direct Plan 62.3754%
ICICI Pru Income Plus Arbitrage Active FOF
ICICI Pru Corp Bond Fund(G)-Direct Plan 60.1607%
ICICI Pru Equity-Arbitrage Fund(G)-Direct Plan 38.0084%
Kotak Income Plus Arbitrage FOF
Kotak Corporate Bond Fund(G)-Direct Plan 59.1219%
Kotak Equity Arbitrage Fund(G)-Direct Plan 39.6616%
Kotak Gilt Fund(G)-Direct Plan 0.0450%
UTI Income Plus Arbitrage Active FoF
UTI Arbitrage Fund(G)-Direct Plan 34.8871%
UTI Corporate Bond Fund(G)-Direct Plan 58.9237%
DSP Income Plus Arbitrage FoF
DSP Arbitrage Fund(G)-Direct Plan 35.9867%
DSP Banking & PSU Debt Fund(G)-Direct Plan 62.3754%
Aditya Birla SL Debt Plus Arbitrage FOF
Aditya Birla SL Arbitrage Fund(G)-Direct Plan 38.6958%
Aditya Birla SL Banking & PSU Debt(G)-Direct Plan 39.6495%
Aditya Birla SL Corp Bond Fund(G)-Direct Plan 10.9621%
Aditya Birla SL Floating Rate Fund(G)-Direct Plan 12.9949%
HSBC Income Plus Arbitrage Active FOF
HSBC Arbitrage Fund(G)-Direct Plan 37.9907%
HSBC Banking and PSU Debt Fund(G)-Direct Plan 13.9892%
HSBC Dynamic Bond Fund(G)-Direct Plan 10.5100%
HSBC Gilt Fund(G)-Direct Plan 16.0306%
HSBC Short Duration Fund(G)-Direct Plan 19.9874%
Bandhan Income Plus Arbitrage FoF
Bandhan Arbitrage Fund(G)-Direct Plan 45.4471%
Bandhan Corp Bond Fund(G)-Direct Plan 71.8199%
Cash & Cash Equivalent 0.0015%
Net Current Asset -17.5166% (this is usually a hedged holding)
Axis says its FOF can be used beyond 2Y, while ICICI recommends 5 years and above. This can be tricky because if the FOF fund manager is going to play the duration game, then the risk profile would change.
While we recommend against investing in this category, if you “must” choose a fund, please follow these steps (assuming you have some experience in debt funds).
- Check the holding for a few months and see how stable it is.
- Check the credit quality of the underlying funds. If it fluctuates too much or suddenly decreases, avoid.
- Invest in such only for long-term goals. Do not use for short-term goals.
- Please avoid the regular plan as the commissions are expected to be high (and therefore the “recommendations”). The ICICI fund direct plan has a TER of 0.03%. The regular plan has a TER of 0.28%. Now add the TER of the underlying direct plans (which will be baked into their NAV).
- Look for a low-cost income plus arbitrage FOF with a narrow mandate and portfolio that does not change too much in economic and market conditions. The more passive the FOF, the better you sleep.
I am glad MF AMCs want to lower our tax burden, but they should also produce uncomplicated products.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.





- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author

Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!


Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: To get in touch, use this contact form. (Sponsored posts or paid collaborations will not be entertained.)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Your Ultimate Guide to Travel
