Fund of income and funds of funds (FoF) — a category that allocates just under 65% to fixed income with the balance to equity arbitrage strategies — saw its assets grow by 75% to nearly 23,500 in February last year, according to data from Value Research. With equity prospects deteriorating in the wake of the West Asian conflict, investment advisers expect the product to become more popular among investors.
“Investors are reluctant to over-allocate to equities as the impact is uncertain given global geopolitical tensions,” says S Shankar, certified financial planner at Credo Capital. “They are allocating new money to safe and tax-efficient strategies such as income and mutual funds.”
The category was created in February last year after mutual funds rebranded some of their existing debt schemes as Funds of Funds (FoFs) – a product that invests in pooling other funds – to take advantage of the tax benefits announced in Budget 2025 for this category. What were originally debt schemes were restructured as fixed income and arbitrage that reduced the tax burden for investors.
Income and gains from mutual funds are taxed at 12.5% if held for more than 24 months. In comparison, capital gains from plain vanilla loan schemes are taxed as per tax slabs. Many fund houses run portfolios under this category with a YTM yield of around 6.9-7.1%.
After accounting for expenses, these schemes can return 6.5 – 6.75%.
“We have kept the duration around 2.5 years as a strategy to generate capital gains when yields fall and also to earn higher returns,” says Shantanu Godambi, fund manager, DSP Mutual Fund. Some fund managers follow a core and satellite strategy, keeping a large portion of the portfolio in fixed income while using a smaller allocation for trading opportunities in bonds. “The core fixed income portfolio is positioned according to a medium-term view of bond yields, while some allocations can be based on a tactical view of the bond market,” says Dal Dalal, director and CIO fixed income, Edelweiss Asset Management.
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