Income plus arbitrage mutual funds: ICICI Pru tops 1-year returns at over 6%; know the portfolio mix

Investors looking for a combination of debt income and arbitrage returns have a mutual fund category that combines both strategies. Income Plus Arbitrage FoFs are hybrid fund-of-funds ( FoFs ) that invest in other mutual fund schemes, rather than directly building the entire portfolio themselves.

Under SEBI ’s framework, these schemes can invest up to 65% in underlying debt-oriented schemes, with the balance invested in underlying arbitrage schemes.

ICICI Prudential Income Plus Arbitrage Omni FoF topped the 1-year return chart at 6.38%, followed by Franklin India Income Plus Arbitrage Active FoF at 6.28%.

*Source: Value Research, Direct plans, Returns as on 18 September 2026

The ICICI Prudential scheme's portfolio shows how the dual strategy works. Its largest underlying exposure is to the ICICI Prudential Arbitrage Fund at 36.88% of assets.

On the debt side, it has 31.22% in ICICI Prudential Corporate Bond Fund, 12.20% in ICICI Prudential Floating Interest Rates Fund, 9.97% in ICICI Prudential Nifty PSU Bond Plus SDL Sep 2027 40:60 Index, and 6.87% in ICICI Prudential Gilt Fund.

Its reported asset allocation is -0.16% equity, 62.76% debt, and 37.4% cash and cash equivalents. A negative equity allocation does not mean the fund has a negative amount of equity.

Such figures can arise from derivative positions, including short or hedging positions, which can result in a negative reported exposure to an asset class.

A traditional arbitrage fund is primarily designed to capture arbitrage opportunities and must maintain at least 65% of its total assets in equity. Its debt exposure is restricted to government securities with a maturity of less than one year and repo in government bonds.

For example, the portfolio of Quant Arbitrage Fund, which had the highest 1-year return among traditional arbitrage funds, has -0.3% equity, 18.26% debt and 82.04% cash and cash equivalents.

The negative equity allocation reflects the fund's derivative positions and does not mean it has no equity holdings. In fact, the fund continues to hold stocks, with HDFC Life, Reliance Industries and Info Edge (India) among its top three equity holdings.

Its debt holdings include Small Industries Development Bank of India Commercial Paper and Reserve Bank of India Treasury Bills.

The two categories use different portfolio structures. An Income Plus Arbitrage FoF gets exposure to both debt-oriented schemes and arbitrage schemes, while a traditional arbitrage fund is structured primarily around arbitrage transactions.

Disclaimer: This is purely for educational/informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.