Excited about Revenue Plus Arbitrage Funds? Know the professionals and cons, hidden dangers, and why pure arbitrage funds should be the safer different.

Within the fast-changing world of mutual funds, innovation typically walks a high quality line between real want and advertising and marketing gimmick. After the federal government eliminated indexation advantages from debt mutual funds in 2023, many fund homes scrambled to seek out new methods to retain investor curiosity.

Enter the so-called “Revenue Plus Arbitrage Funds” — a cleverly branded class that guarantees higher returns than financial savings accounts, equity-like taxation, and low threat.

Sounds good? Not so quick.
Earlier than you get lured into these shiny new wrappers, it’s essential to know the reality behind the advertising and marketing and why it’s best to avoid these gimmicks.

Keep away from Revenue Plus Arbitrage Funds: A Dangerous Tax Gimmick

No SEBI Recognition, No Clear Rules

First and most significantly:
There may be NO SEBI-defined class referred to as an “Revenue Plus Arbitrage Fund.”

These funds are simply internally designed hybrids, combining:

• Arbitrage trades (purchase inventory in money market, promote futures of the identical inventory), and
• Debt investments (company bonds, treasury payments, business papers).

As a result of SEBI doesn’t regulate them below a selected framework, the fund supervisor enjoys huge discretion:

• One month, the portfolio may very well be 70% arbitrage and 30% debt.
• The following month, it might flip to 40% arbitrage and 60% debt.
• Worse, debt high quality might differ — from protected authorities securities to riskier company bonds.

As an investor, you’re getting into a gray zone with out even realizing it.
You might have no assurance about how your cash will probably be allotted — particularly in risky markets.

Designed to Exploit the Tax Loophole

The actual purpose these merchandise exist is easy:
To supply fairness taxation advantages to conservative traders who in any other case would have stayed in protected debt funds or fastened deposits.

As a result of these “Revenue Plus” funds make investments a minimal 65% in equities (via arbitrage), they qualify as fairness funds for taxation:

• Quick-Time period Capital Positive factors (STCG) taxed at 20%.
• Lengthy-Time period Capital Positive factors (LTCG) above Rs.1.25 lakh taxed at 12.5%.

Evaluate this to pure debt funds, the place:

• Quick-term or long run beneficial properties are taxed at your slab fee (as much as 30%) regardless of your holding interval.

No surprise AMCs are aggressively advertising and marketing this — not in your profit, however to maintain their AUM (property below administration) rising.

Hidden Dangers Lurking Inside

Regardless of being projected as a “protected” parking spot for idle money, these funds carry critical hidden dangers:

1. Credit score Threat from the Debt Portion

This can be a large concern. With out a clear mandate, such funds can take undesirable credit score threat. Therefore, knowingly or unknowingly, you find yourself with a dangerous debt portfolio.

• Fund managers may put money into lower-rated company bonds to spice up returns.
• If the corporate defaults or faces a downgrade, the fund’s NAV might take a sudden hit.
• Bear in mind Franklin Templeton’s debt fund crisis? Traders discovered the exhausting method that credit score threat is actual.

Allow us to take the instance of few funds. Kotak Revenue Plus Arbitrage FoF portfolio is holding round 59% of its portfolio in Kotak Company Bond Fund Direct Progress. Similar method, DSP Revenue Plus Arbitrage Fund of Fund is holding round 46.5% of its holdings in DSP Banking and PSU Debt Fund – Direct Plan – Progress. Additionally, Bandhan Revenue Plus Arbitrage Fund of Funds is holding round 61% in it’s Bandhan Company Bond Fund – Direct Progress. HDFC Revenue Plus Arbitrage Lively FoF – Direct Plan is holding round 53% in HDFC Company Bond Fund.

If you happen to blindly look into different funds additionally, it’s the identical story. Therefore, it’s a must to ask your self of how a lot snug you might be in taking such BLIND threat.

2. Curiosity Fee Threat

• If rates of interest rise sharply, the worth of the debt holdings can fall and vice verse. In case your debt portfolio consists of long run bonds, then such volatility is big.
• This could erode the portfolio worth, particularly in short-term timeframes.

3. Liquidity Threat

• Throughout occasions of market panic (e.g., March 2020 COVID crash), arbitrage spreads dried up.
• This implies the so-called “protected” arbitrage technique generated nearly no return for months.

4. Portfolio Transparency Points

• Not like pure arbitrage funds or regulated debt funds, these hybrids don’t disclose detailed, fastened mandates for asset allocation.
• Traders are blindly trusting fund managers — with out figuring out how a lot threat they’re taking at any given time.

5. Majority of those funds are previous wine in new bottle

If you happen to look into the age of those funds, you’ll discover that few are displaying as 3+, 5+, or 10+ years previous. However don’t go by this. They’re earlier in a distinct avatar than what they’re right this moment. For instance, DSP Revenue Plus Arbitrage Fund of Fund was earlier DSP International Allocation Fund of Fund. Kotak Revenue Plus Arbitrage FOF was earlier Kotak All Climate Debt FOF. Similar method, Bandhan Revenue Plus Arbitrage Fund of Funds was earlier Bandhan All Seasons Bond Fund. ICICI Prudential Revenue Plus Arbitrage Lively FoF, earlier model was ICICI Prudential Revenue Optimizer Fund (FOF). HDFC Revenue Plus Arbitrage Lively FOF, earlier model was HDFC Dynamic PE Ratio Fund of Funds. I’m simply highlighting the few. You may cross examine by yourself with different funds, additionally. The story will stay the identical.

6. By no means depend on previous returns

As these funds are the brand new model of earlier debt funds, it’s exhausting to imagine that previous returns will proceed in future. Therefore, by no means evaluate the returns to evaluate that these are superior than Arbitrage Funds.

Why Plain Arbitrage Funds Are Safer

In case your purpose is tax effectivity + security, then pure arbitrage funds are a much better possibility.

• Pure arbitrage funds are regulated clearly by SEBI.
• They solely concentrate on hedged positions in inventory markets — shopping for in money and promoting in futures.
• They keep away from the complexity and threat of holding unknown debt devices.
• Returns sometimes vary from 5% to 7% every year — much better than financial savings accounts or liquid funds, with far decrease threat.

No pointless gimmicks. No hidden publicity. No worrying about what the fund supervisor is cooking behind the scenes.

Easy is at all times safer.

Don’t Be a Scapegoat

Let’s name a spade a spade:
“Revenue Plus Arbitrage Funds” are cleverly disguised traps to catch unsuspecting traders who’re chasing post-tax returns.

Fund homes know that after debt fund taxation modifications, they might lose an enormous chunk of AUM.
So as an alternative of innovating responsibly, they invented a blurry, loosely structured product — one which:

• Appears to be like protected,
• Feels acquainted,
• However hides important threat below the hood.

As an investor, it’s best to by no means fall for such gimmicks. Your cash deserves higher — readability, transparency, and ease.

The Clever Investor’s Method

• In case your purpose is idle cash parking,
• If you wish to earn higher than a financial savings account,
• If you would like tax effectivity with out hidden threat,

then the trail is evident: Stick with pure arbitrage funds.

You don’t want an “revenue plus” gimmick to attain your objectives. You want self-discipline, not determined innovation. Nonetheless, beware that Arbitrage Funds might generate few months of unfavourable returns throughout fairness market volatility (Can Arbitrage Funds give negative returns?).

Last Phrase: Keep Easy, Keep Secure

Revenue Plus Arbitrage Funds aren’t options. They’re merchandise designed to learn fund homes, not traders. At a time when monetary advertising and marketing is getting more and more subtle, it’s extra necessary than ever to keep rooted in easy, clear funding rules. Don’t be a scapegoat. Don’t commerce security for gimmicks. Stick with pure Liquid Fund or arbitrage funds in your short-term necessities.