Tata Asset Management rolls out Tata Income Plus Arbitrage FoF; can low-risk bets deliver now?

Tata Asset Management has introduced a new hybrid mutual fund, Tata Income Plus Arbitrage Active Fund of Fund (FoF), aiming to provide investors with low volatility and tax-efficient returns amidst market uncertainty. The New Fund Offer (NFO) opens today and will be available until May 19, allowing investors to benefit from a blend of interest from corporate bonds and equity arbitrage returns. 

Designed for a two-year investment horizon, this fund seeks to offer stability and accrual-oriented returns, allocating a maximum of 65% to Tata Corporate Bond Fund and a minimum of 35% to Tata Arbitrage Fund, ensuring a balance between debt stability and equity tax efficiency over this duration. 

The Tata Income Plus Arbitrage Active FoF is structured to cater to investors looking for stable, accrual-based returns with tax efficiency. The fund requires a minimum investment of Rs 5,000, with equity taxation benefits applying after a two-year holding period, and an exit load of 0.25% for redemptions within 30 days. The Tata Corporate Bond Fund targets accrual returns through selective duration management, while the Tata Arbitrage Fund focuses on generating short-term gains through a 100% hedged equity portfolio. This FoF structure provides a balanced approach with enhanced tax efficiency compared to standalone funds when held beyond two years. 

Fund Manager Sailesh Jain highlighted the strategic advantage of this hybrid approach, noting, "In an environment where debt yields are attractive but equity markets remain volatile, a hybrid approach like this can potentially offer better post-tax returns than traditional debt instruments." The fund's design intends to navigate market volatility effectively, presenting a compelling case for investors seeking alternatives to traditional debt options, especially given the current market conditions.

Arbitrage funds, such as the Tata Arbitrage Fund, aim to exploit price differences of securities across various markets or segments, primarily benefiting from arbitrage opportunities in equity markets. These funds offer a safer investment route, as the buying and selling prices are predetermined by fund managers, making them suitable for a 1-3 year investment horizon. The strategy has gained traction among investors looking for the safety of debt combined with the flexibility and tax efficiency of equity-linked products.

Performance metrics indicate the Tata Corporate Bond Fund - Regular Plan has delivered an annualised return of 8.43% over a one-year horizon, compared to 7.97% from the Crisil Corporate Bond A-II index. Since its inception in 2021, the fund has returned 5.96%. Meanwhile, the Tata Arbitrage Fund - Direct Plan ranks highly among arbitrage funds for both 1-year and 5-year SIP returns, delivering 8.05% over a 1-year SIP and 7.06% over a 5-year SIP. These figures underline the potential of the new FoF to offer competitive returns in a varied investment landscape.

How do Arbitrage funds work

1. Identify price differences

Fund managers look for temporary price mismatches between:

The cash market (where stocks are traded for immediate delivery)

The futures market (where the same stocks are bought/sold at a future date)

Example:

Stock XYZ trades at Rs 100 in the cash market

The same stock’s futures contract trades at Rs 102

2. Simultaneous Transactions

To lock in the price differential:

The fund buys the stock in the cash market at Rs 100

Simultaneously, it sells the futures contract at Rs 102

This locks in a Rs 2 risk-free spread per share.

3. Profit from Price Convergence

At futures contract expiry:

The cash and futures prices converge

The fund delivers the stock sold earlier in futures

It pockets the spread as profit, irrespective of overall market movement

Example in Action

Market    Action                    Price    Result
Cash Market    Buy stock    ₹100    Owns stock
Futures Market    Sell futures    ₹102    Obligated to deliver stock
At expiry    Deliver stock    ₹100    Profit = ₹2/share

Benefits of Arbitrage Funds

> Low Risk    Positions are hedged (buy-sell pair), so exposure to market volatility is minimal
> Consistent Returns    Exploits predictable price differences rather than betting on market direction
> Volatility Hedge    Can generate returns even in choppy or sideways markets
> Tax-efficient    Treated as equity for taxation (if equity exposure ≥65%), with lower tax rates

Things to Note

Returns can be modest, often in the 4–7% range annually

Profitable only when price gaps exist, which may shrink in calm markets

Exit loads or lock-ins may apply in short durations