NFO alert: Mahindra Manulife to launch Income Plus Arbitrage Active FoF on Nov 21; who should watch it

Mahindra Manulife Mutual Fund has announced the launch of Mahindra Manulife Income Plus Arbitrage Active Fund of Fund (FoF), an open-ended scheme designed for investors seeking relatively stable, tax-efficient returns over investment horizons beyond 24 months. The New Fund Offer (NFO) will open on November 21, 2025, and conclude on December 1, 2025. A joint venture between Mahindra & Mahindra Financial Services Ltd. and Manulife Investment Management (Singapore), the fund house says the new FoF blends the predictability of debt with the low-risk return characteristics of equity arbitrage—making it suitable for conservative investors looking to improve after-tax outcomes without taking on equity market volatility.

According to the fund’s investment framework, the scheme will dynamically invest in a mix of actively managed debt schemes and arbitrage schemes, allowing flexibility to respond to shifting interest-rate cycles, changing arbitrage spreads, and reinvestment risks that typically challenge traditional fixed-income investments.

Commenting on the launch, Anthony Heredia, MD & CEO, Mahindra Manulife Investment Management, said the new FoF was conceptualised as an “all-season proposition” combining the stability of debt with the consistency of arbitrage. “In a market where spreads, interest rate cycles and reinvestment risks create uncertainty, this product offers a disciplined approach aimed at better post-tax outcomes,” he noted.

Rahul Pal, CIO – Fixed Income, highlighted the fund’s ability to balance interest-rate dynamics and liquidity within a single solution. “The debt portion will be managed through active duration positioning and a disciplined credit framework, while the arbitrage allocation helps smoothen volatility during periods of rate uncertainty,” he said, adding that this structure is intended to provide a steadier medium-term investment experience.

The scheme will be jointly managed by Amit Garg, Rahul Pal, and Mitul Doshi, and will follow Mahindra Manulife’s established investment processes, combining duration management, credit evaluation and tactical allocation to arbitrage opportunities.

What are Income Plus Arbitrage Funds?

Income Plus Arbitrage Funds combine hedged equity arbitrage with high-quality debt instruments to deliver predictable returns with lower volatility. Arbitrage involves buying stocks in the cash market while simultaneously selling them in the futures market, capturing the differential at expiry. Returns typically align with money-market yields and remain largely immune to equity price swings.

Most schemes maintain 65% in arbitrage and 35% in debt to qualify as equity-oriented for tax purposes. Fund-of-Funds structures often follow a similar allocation, though with higher flexibility. The debt component—spread across corporate bonds, government securities and short-duration funds—anchors stability, while the arbitrage portion provides consistency with minimal risk.

A major advantage is tax efficiency: investors holding the fund for more than 24 months benefit from 12.5% long-term capital gains (LTCG) tax, far lower than the slab-based taxation applicable to traditional debt funds or fixed deposits.

How existing Income Plus Arbitrage Funds have performed

Peer funds from ICICI Prudential, Bandhan, Axis, HDFC and Kotak have delivered steady returns across time frames. One-year returns across the category currently fall in the mid-single digits, with some funds achieving slightly higher outcomes due to better arbitrage capture. Over three- and five-year periods, returns have been notably consistent, echoing the category’s mandate of delivering stable income with limited downside.

Longer track records—particularly those of ICICI Prudential and Bandhan—show 10-year stability, making these funds suitable for conservative and short-term allocation strategies. Year-by-year trends indicate very few drawdowns, even during high volatility, with performance rankings usually in the second to third quartile. Certain schemes, including ICICI Prudential and HDFC, periodically move into the top quartile when arbitrage spreads widen or bond yields turn favourable.

Risk metrics remain low across the category. Standard deviation levels stay well below broader hybrid and equity funds, while positive Sharpe ratios reflect the steady accrual nature of the portfolio.

Most schemes maintain sizeable allocations to AAA-rated debt, underlying arbitrage funds and cash equivalents, ensuring liquidity and consistent return delivery. The combination of high-quality debt and hedged arbitrage exposure positions these funds as dependable, low-risk solutions for investors seeking predictable returns with enhanced tax efficiency.