Context:
Mutual funds are repackaging some of their existing debt schemes into Fund of Funds (FoFs). This move leverages tax benefits announced in the previous year’s budget. These restructured funds will now invest in both bonds (fixed income) and arbitrage strategies.
Structure of New Schemes
- The restructured funds will
- Invest slightly less than 65% of their corpus in fixed income instruments.
- Invest the balance in arbitrage (simultaneous buy and sell of shares and futures to exploit price differentials).
- Gains from these schemes, if held for more than 24 months, will be taxed as long-term capital gains (LTCG) at 12.5%.
- In contrast, plain debt schemes are taxed at individual tax slabs (up to 30% for high-income individuals and corporates).
Key Fund Changes
| Existing Fund Name | New Name |
|---|---|
| Kotak All Weather Debt FoF | Kotak Income Plus Arbitrage FoF |
| Bandhan All Seasons Bond Fund | Bandhan Income Plus Arbitrage Fund of Fund |
| Axis All Seasons Debt Fund of Funds | Axis Income Advantage Fund of Funds |
| ABSL Active Debt Multi Manager FoF | ABSL Debt Plus Arbitrage FoF |
- Kotak, Aditya Birla, Bandhan: Invest primarily in their own fund house’s debt schemes.
- Axis Mutual Fund: Uses a multi-strategy approach, investing in debt schemes of multiple AMCs.
Expert Views
- Deepak Agrawal, CIO (Debt), Kotak Mahindra AMC: A mix of debt and arbitrage could offer higher returns with tax efficiency compared to pure debt schemes and potentially outperform pure arbitrage funds over 2-3 years.
- Devang Shah, Head of Fixed Income, Axis Mutual Fund: The strategy follows dynamic allocation across short-to-long duration bonds based on macroeconomic views. Currently, the fund is positioned with high duration expecting future rate cuts.
Costs and Trade-offs
- These schemes come with higher expenses compared to traditional debt products due to the double-layered expense ratio (main fund + underlying funds).
Mutual funds are creatively adapting to tax changes by blending debt and arbitrage strategies in FoF structures. For wealthier investors and corporates, these funds present an opportunity for better post-tax returns than conventional debt schemes, though at a slightly higher cost.
Source: Economic Times
