Union MF’s new Income Plus Arbitrage Active FoF offers investors the twin advantages of tax efficiency (12.5% LTCG for 2 yr + holding) and active management of duration strategies to deliver superior post tax return potential to investors.
The fund will maintain 40% in arbitrage (to get tax efficiency) and the balance 60% will be deployed dynamically across the fund house’s range of debt funds, based on interest rate views from time to time.
FoF structure provides unique ability to move dynamically and very swiftly to align portfolio to fast changing market conditions. While some product categories like dynamic bond funds also have a wide mandate to move across the spectrum of duration, moving an entire portfolio takes a lot more time and effort than changing allocation within a FoF – which happens a lot quicker.
Parijat expects 2 more rate cuts in this cycle and sees the 10 yr GSec yield moving down from 6.27-6.30% levels to 5.75-6% range over the next couple of quarters.
The debt component of the fund’s initial portfolio will likely have a large allocation to the AMC’s corporate bond fund and then some allocations across longer duration funds. As interest rates come down to expected terminal levels, expect longer duration funds’ allocations to reduce in this FoF.
Funds within the Income Plus Arbitrage FoF category which adopt an active strategy for the debt component can be pitched as all weather debt funds to conservative investors.
Parijat sees this category growing comfortably to Rs. 1lakh crore, given its wide appeal across investor segments and its competitive position vs traditional fixed income instruments.