Axis Income Plus Arbitrage Passive FoF — Here’s how arbitrage passive funds work; best performing funds right now

Axis Mutual Fund has launched the Axis Income Plus Arbitrage Passive Fund of Fund (FoF), an open-ended hybrid scheme designed to generate stable, debt-like returns with low volatility and superior tax efficiency. The New Fund Offer (NFO) opened for subscription on October 28 and will close on November 11, 2025.

The scheme seeks to offer investors the benefits of both passive fixed-income investing and market-neutral arbitrage strategies, blending two asset classes to provide an efficient risk-return balance. It will be benchmarked against a composite index consisting of 65% NIFTY Short Duration Debt Index and 35% Nifty 50 Arbitrage TRI.

Fund strategy, portfolio structure

According to Axis Mutual Fund, the scheme will allocate 50–65% of its portfolio to passive debt-oriented mutual fund schemes and 35–50% to arbitrage funds. The debt segment will primarily focus on high-quality, short-duration instruments through underlying schemes that follow a roll-down strategy — enabling investors to lock in accrual income while mitigating interest rate risk over time.

The arbitrage component, meanwhile, will consist of fully hedged equity positions, exploiting temporary price differences between cash and futures markets. Since the positions are entirely hedged, the fund avoids directional market exposure, delivering returns with minimal volatility.

Axis Mutual Fund stated that the fund’s hybrid structure aims to deliver steady, tax-efficient, and liquid returns, allowing T+2 settlement for redemptions. Internal portfolio adjustments can be carried out within the fund without creating any tax events for investors.

As per the latest taxation framework, this hybrid structure qualifies for long-term capital gains (LTCG) tax of 12.5% if held for over 24 months, making it a viable alternative to traditional debt funds or fixed deposits.

Arbitrage Mutual Funds

Arbitrage funds are hybrid mutual funds that generate profits from price discrepancies across different markets or segments. Fund managers buy an asset in one market and sell it in another where the price is higher, locking in a risk-free spread.

Because both buy and sell prices are predetermined, arbitrage funds carry negligible stock market risk. They are suitable for investors with short- to medium-term horizons (1–3 years) and seek tax-efficient returns comparable to equity-oriented schemes. These funds are particularly attractive in volatile markets, where more frequent price gaps create additional arbitrage opportunities.

Current market trends

Arbitrage funds have gained renewed traction among investors seeking stable, low-risk returns amid fluctuating equity and bond markets. In 2025, most arbitrage funds have delivered annualised returns between 7% and 8.2%, outperforming traditional short-term debt instruments on a post-tax basis.

Some of the top-performing arbitrage funds over recent periods include:

Kotak Equity Arbitrage Fund

Nippon India Arbitrage Fund

Edelweiss Arbitrage Fund

Invesco India Arbitrage Fund

Axis Arbitrage Fund

Evaluating Arbitrage Fund consistency

Arbitrage funds offer stable, low-risk returns suitable for short- to medium-term investment horizons. The uploaded performance data was evaluated using two selection methods. Method A focused solely on the highest numerical returns, identifying distinct outperformers in each period. For instance, Quant Arbitrage Fund led over one month, while Motilal Oswal Arbitrage Fund topped the six-month period.

However, relying exclusively on top-line returns can obscure the consistency and durability of performance. Method B introduced a quality filter, factoring in the breadth of track records and long-term stability. This approach highlighted the Invesco India Arbitrage Fund for its superior multi-year consistency and comprehensive long-term data, while the ITI Arbitrage Fund appeared competitive in shorter durations.

The combined evaluation underscores that while certain funds may deliver exceptional returns in isolated timeframes, sustained performance consistency carries greater weight for investors with longer investment horizons. Hence, fund selection should align with one’s tenure, liquidity needs, costs, tax considerations, and risk appetite, rather than focusing solely on headline returns.

Period    Method A – Fund    Method A – Return (%)    Method B – Fund    Method B – Return (%)

1 Month    Quant Arbitrage Fund – Direct Plan    0.6    ITI Arbitrage Fund – Direct Plan    0.58

6 Months    Motilal Oswal Arbitrage Fund – Direct Plan    3.39    Invesco India Arbitrage Fund – Direct Plan    3.1

1 Year    WhiteOak Capital Arbitrage Fund – Direct Plan    7.34    ITI Arbitrage Fund – Direct Plan    7.28

3 Years    Invesco India Arbitrage Fund – Direct Plan    7.88    Invesco India Arbitrage Fund – Direct Plan    7.88

5 Years    Invesco India Arbitrage Fund – Direct Plan    6.57    Invesco India Arbitrage Fund – Direct Plan    6.57

10 Years    Edelweiss Arbitrage Fund – Direct Plan    6.58    Edelweiss Arbitrage Fund – Direct Plan    6.58
 

Investors should note

By introducing the Axis Income Plus Arbitrage Passive FoF, Axis Mutual Fund is catering to investors seeking steady, low-volatility income with tax advantages and shorter holding periods. The fund’s dual exposure to passive debt and arbitrage instruments positions it as a compelling solution for conservative investors looking for predictable, post-tax-efficient returns amid uncertain interest rate and equity market conditions.