NFO Pick – (Union Income Plus Arbitrage Active FOF)

2 Jun 2025 , 02:45 PM

KEY MERITS OF UNION INCOME PLUS ARBITRAGE ACTIVE FOF NFO

There are several distinct advantages that the Union Income Plus Arbitrage Active FOF brings to the table.

• It simplifies the investment process to a large extent. At the entry point, the investor just buys one fund, which at the back-end gets allocated between arbitrage and debt funds.
• Since this is a fund of funds (FOF), it comprises of units of other mutual funds. Thus, diversification is automatically built into the product.
• The Union Income Plus Arbitrage Active FOF is tax neutral in the sense that changes to the fund portfolio, do not entail any capital gains tax liability for the investor.
• The FOF is also tax efficient since the taxation is based on the debt fund component. The idea is to keep the arbitrage portfolio above 65% to get equity fund taxation benefits.
• Above all, this fund brings to the table fund manager expertise in fund selection; which is optimized based on the outlook for equities, and interest rates.

Let us now look at how Union Budget 2024, made a big case for such debt oriented FOFs.

HOW WILL THE UNION INCOME PLUS ARBITRAGE ACTIVE FOF BE TAXED?

Effective the last Union Budget presented in July 2024, all FOFs will be taxed based on the equity / debt component. As a hybrid fund, Income Plus Arbitrage Fund has 2 options.

• The equity portion (arbitrage) is more than 65% of fund composition, which makes it an equity fund for taxation purposes. If held for more than 1 year, the LTCG will be taxed at 12.5% after the base exemption of ₹1.25 Lakhs per annum.
• The equity portion (arbitrage) is between 35% and 65%, which makes it hybrid fund for taxation. Here, if held for more than 2 years, the LTCG will be taxed at a concessional rate of 12.5%. It is this combination that makes Income Plus arbitrage funds attractive.

Even in the latter scenario, it is more tax efficient compared to a pure debt fund, which is now taxed at your peak incremental rate of tax applicable. In these debt funds, there are no benefits of long term capital gains available.

POWER OF ACTIVE MANAGEMENT BY FUND MANAGERS

Being run by skilled fund managers, the actively managed FOF can dynamically allocate funds across the arbitrage basket and the income fund basket. Here is how it can work.

• If the fund manager expects greater volatility and wider arbitrage spreads; they can capitalize on this trend by increasing their share to arbitrage funds. For example, arbitrage funds have given higher returns in last 2 years, amid volatility.
• If the fund manager expects rates to fall, they can increase the exposure of the fund to long dated security funds, that will gain the most from a fall in interest rates. This gives a higher leverage on debt fund portion.
• If a hike in interest rates is expected, then there can be a shift made to floating rate funds or perhaps to short term liquid funds to be immune from the price fall.

This dynamic approach allows fund managers to add their bit to the performance of the funds.

GLANCE AT THE UNION INCOME PLUS ARBITRAGE ACTIVE FOF NFO

Here are key details of the Union Income Plus Arbitrage Active FOF NFO.

• The NFO opened on May 22, 2025 and closes on June 05, 2025. Post the allotment of units to investors, the fund will re-open for fresh purchases and redemptions within 5 business days of allotment.
• The objective of the fund is to generate income over the medium to long term by investing in a combination of arbitrage funds and income funds. Hence, it will be structured as an active Fund of Funds (FOF).
• On the risk-o-meter, Union Income Plus Arbitrage Active FOF is classified as “Low to Moderate Risk,” due to its predominant exposure to debt instruments and to cash-futures arbitrage, which mirrors debt in terms of risk and returns.
• The Union Income Plus Arbitrage Active FOF will be best suited to investor who are looking at a simplified investment approach with automatic diversification. This fund also brings to the table skilled fund management and substantial tax efficiencies.
• Union Income Plus Arbitrage Active FOF offers Regular and Direct plans. It also offers Growth option and IDCW option to investors. Vishal Thakker will be the fund manager for the arbitrage portion, while Anindya Sarkar and Shrenuj Parekh will be the co-managers for the fixed income (debt) portion.
• Minimum application amount in NFO is ₹1,000 and in multiples of ₹1 thereof. Subsequent additional investments will also be of minimum ₹1,000. Fund will be benchmarked to 60% Nifty Composite Debt Index and 40% Nifty 50 Arbitrage Index.
• There will be no entry loads anyways. In the case of the Union Income Plus Arbitrage Active FOF, there also will not be any exit load, irrespective of holding period. However, a holding period of at least 5-10 years is recommended.

Union Income Plus Arbitrage Active FOF offers a combination of the stability and reliability of debt funds with the tax efficiency of arbitrage funds. Investors looking at steady income over the long run can look at this option closely.