Axis Income Plus Arbitrage Active FOF: Stability and tax efficiency

What is Income Plus Arbitrage FOF?

The Income plus arbitrage FOFs invest a maximum of 65% of their funds in underlying debt-oriented schemes and the balance investment in arbitrage schemes. Since the equity allocation (Arbitrage portion) of these schemes are between 35 to 65%, long term capital gains (investment holding period of more than 2 years) are taxed at 12.5%.

Why Income plus Arbitrage now?

1. Tax efficiency: In times of economic and geopolitical uncertainty many investors prefer the stability of fixed income. Income plus Arbitrage funds provide twin benefit of debt like stability coupled with tax efficiency if the investments are held for more than two years. For investors in the higher tax brackets or corporates these funds are much more tax-efficient compared to traditional fixed income (e.g. Bank FDs) and ordinary debt funds.
   
   

   



2. The best of both worlds: Stability Meets Opportunity Debt funds are stable-they invest in government securities, corporate debt, and other secure instruments. Arbitrage funds, however, take advantage of price disparities in the market by buying and selling the same asset in different markets at the same time. This approach enables them to provide consistent returns with little risk especially in volatile markets. By putting these two together, Income Plus Arbitrage FOF give your money the stability of debt and exploiting market inefficiencies through arbitrage strategy.


3. Performance metrics: Lower variability in returns across interest rate cycles: Over the past 20 years, the 65% debt and 35% arbitrage simulation has shown relative low volatility and stable performance (2-year Post Tax return) in various market cycles as shown in the chart below. It is particularly effective in volatile market conditions, providing a stable and tax-efficient investment option for investors
   
   

   

   Source: Axis MF Internal Analysis. FY23-25 data as on 28th March 2025. Proxies considered for Arbitrage, Duration, Short, Credit, Conservative Hybrid and Equity Savings Strategy - Average returns of all the active funds in the category during the time-period considered. 65% Debt + 35% Arb - 65% Debt: 65% in performing category across Duration, Short and Credit based on market cycles; 35% Arbitrage: category average. Past performance may or may not sustain in future. This is for illustration purpose only

Axis Income Plus Arbitrage Active Fund of Funds: Regular Growth option

Formerly known as the Axis Income Advantage Fund of Funds, the Axis Income plus Arbitrage Active FOF is an open-ended fund of funds scheme investing in debt oriented mutual fund schemes and arbitrage funds. The fund is dynamically managed in terms of duration and credit, adapting to the current market conditions and the insights of the fund manager. The fund invests in units of arbitrage funds with 35-50% allocation to ensure a tax-efficient optimal solution for investors with a horizon of 2 years or more. The benchmark of the Axis Income and Arbitrage Active FOF is 65% NIFTY Composite Debt Index + 35% Nifty 50 Arbitrage TRI since 14^th Feb. 2025.

Investment strategy

• Top-Down Approach: - The Axis Income Plus Arbitrage Active Fund of Funds employs a top-down investment approach, conducting a comprehensive analysis of macroeconomic factors to select the fund positioning based on duration and credit considerations. Factors such as the yield curve, inflation rates, GDP growth, spreads, monetary policy cycle, demand and supply of G-secs/corporate bonds and overall market liquidity determine the optimal duration for investments.


• Selection from Top 10 Debt AMCs: The underlying debt funds are selected based on their alignment with the fund managers' macroeconomic views and strategy. Further, the assessment of the underlying debt funds includes evaluating the fund's corpus, track record of execution, consistency in performance, TER and exit load. The Fund managers aim to prioritize funds from within the top 10 Debt AMCs, only considering options beyond this group if similar strategies are unavailable within the top 10.
  
  

  

  Source: Axis AMC. .*These are internal limits, excludes Axis funds and Liquid, Overnight, Money Market schemes with <1 year duration and Arbitrage schemes. ^Only considering options beyond this group if similar strategies are unavailable within the top 10 AMCs.



• Changed strategy to include corporate bonds: Earlier the FOF had a higher bias towards government bonds in the portfolio. However, the fund managers are gradually reducing duration and building positions in the corporate bonds segment with a belief that the corporate bond segment will become more attractive due to the reduced supply of corporate bonds/CDs given the slowdown and the delay in implementing LCR guidelines.
  
  

  

  Source: Axis AMC



• Flexibility of investment: Flexibility to invest across the fixed income curve and take advantage of duration and credit cycle enabling fund to capture opportunities in all market scenarios. Fund has invested on an average more than 75% in top 2 best performing strategies.
  
  

  

  Source: Axis AMC

Fund Performance

The chart below shows that the fund has performed better than its benchmarks across most periods.

Source: Advisorkhoj Research, Axis MF, as on 30^th April 2025

Portfolio Construct

The Portfolio selection is made with the following focus:

• High-Quality bias: The fund endeavours to maintain a high-quality bias, focusing on schemes investing in AAA-rated securities and dynamically adjusting its allocation based on market conditions to optimize return.


• Dynamic allocation: The fund employs a dynamic allocation strategy by adjusting duration, credit, and cash based on the prevailing market environment and macroeconomic outlook, through change in exposure to underlying funds.


• Multi fund house strategy: No tax impact to investor when a Fund of Funds redeems from one fund to shift to another. Ease of rebalancing portfolio based on market changes. Better diversification & lower single manager risk in case of credit events. Fund Manager Diversification with our overlay on the overall duration and credit risk of the fund. Better post tax returns over a holding period of 24 months

Current portfolio construct

Source: Axis MF, as on 30^th April 2025

Income Arbitrage Fund versus Debt Fund + Arbitrage Fund

The main benefit here is again the taxation. Suppose your portfolio has a mix of 60% in debt and 40% in arbitrage, long term capital gains from 60% will be taxed as per income tax slab, while the long-term capital gains 40% would be taxed at 12.5% (after allowing exemption of up to 1.25 lakhs). In Income plus Arbitrage FOFs, the entire long term capital gains are taxed at 12.5%.

Let us assume you want to invest Rs 50 lakhs, with 64% allocation to debt and 36% allocation to arbitrage. Your investment tenure is 2 years, and your income tax slab rate is 30%. Your capital gains in debt fund will be taxed at your income tax slab rate and capital gains arbitrage will be treated as long term capital gains in equity taxation i.e. exempt up to Rs 1.25 lakhs and taxed at 12% thereafter. You can see that your effective tax rate is 22.4% in this example. If you had invested in in Income Plus Arbitrage FOF, your capital gains tax rate with an investment tenure of 2 years or more would be 12.5%.

*CAGR returns considered for debt fund returns is 7.2% by taking mean of 10-year rolling returns between 1 June 2013 and 30 May 2023 of 10 year G-Sec. The above illustration is provided as per AMFI Best Practice Guidelines Circular No. 109 dated November 1, 2023 and as amended from time to time to define the concept of power of compounding. Mean. CAGR returns for Arbitrage Funds is based on 10 year CAGR of Nifty 50 Arbitrage Index from 30-04-2015 to 30-04-2025. The above illustration is purely for investor education purpose and does not represent actual taxation. Consult with your tax advisor to know the taxation of your capital gains.

Furthermore, investor need not switch between debt funds based on change in views. If they individually invest in each fund - there will be tax implication when investor redeems and reinvests in another fund. In FoF, there is no tax impact on the investor when the FOF switches from one debt fund to another.

Who Should Invest in Axis Income Plus Arbitrage Active Fund of Funds?

• Investors who have an investment horizon of more than 2 years.


• Investors seeking a multi-manager model to reduce FM bias and diversify the risk emanating from any credit events


• Investors looking to benefit from debt-like stability with efficient taxation (12.5% LTCG after 2 years)

Contact your financial advisor or mutual fund distributor to understand how you can include the Axis Income plus Arbitrage Active FOF in your portfolio.