Should you invest in income plus arbitrage funds?

A brand-new mutual fund category is quickly gaining popularity. Several fund houses - Bandhan, Axis (taxed at 12.5 per cent) would cost just Rs 12,500. That's a 60 per cent tax saving. What about returns and risk? Let's look at the performance first. The average one-year returns, rolled on a daily basis over the last five years, for arbitrage funds are around 5.6 per cent, while short-duration debt funds have delivered 6.8 per cent. Regarding risk, the worst one-month return for arbitrage funds over the last five years was -0.22 per cent, with less than 0.5 per cent of the time turning negative. This indicates that arbitrage funds may lag slightly in returns, but continue to offer downside protection and steady performance. However, since these are fund of funds (FoFs), you end up paying two sets of fees—one for this fund, and one for the funds it invests in—which can eat into your final returns. Can they replace traditional debt funds? That's still too early to say. Yes, the tax benefit is compelling, especially for investors in higher slabs with