What are target maturity passive debt funds?

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Many fund houses are rushing to launch passive debt funds (Index and ETFs) which come with target maturity.

In the recent past, Aditya Birla Sun Life, Nippon, ICICI Prudential, Axis, and Edelweiss have launched debt funds tracking Nifty AAA Bond Plus SDL index. According to fund houses, the five-year space has seen yields rise by over 50 basis point since its low in December 2020. This makes yields attractive as compared to other tenors. Such funds are being positioned for investors looking to invest with a 4 plus year investment horizon. These funds fall in the Medium to Long Duration category.

As the name suggests, these funds are benchmarked against Nifty AAA Bond Plus SDL which come with a series of maturities which are as follows:

For instance, Axis Nifty AAA Bond Plus SDL matures in 2026. Nifty AAA Bond Plus SDL Apr 2026 50:50 Index has 6 AAA issuers and 6 SDLs and comprises a portfolio of AAA rated bonds issued by government-owned entities, Housing Finance Corporation (HFCs), Corporates and State Development Loans (SDLs) maturing between May 01, 2025 to April 30, 2026.

ICICI Prudential PSU Bond plus SDL 40:60 Index Fund Sep 2027 invests in the constituents of Nifty PSU Bond Plus SDL Bond Sep 2027 40:60 Index. Around 40% of the index comprises PSU Bonds and 60% SDLs. The weights of each issuer in the index are capped at 15%. The fund manages assets worth Rs 518 crore as on September 2021.

Edelweiss MF has launched two such passive funds in the recent past which are Nifty PSU Bond Plus SDL Index Fund – 2026 and Edelweiss NIFTY PSU Bond plus SDL Index Fund – 2027. Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2026 manages assets worth Rs 3163 crore as of September 2021.

These funds typically have a defined maturity and predictable return trajectory. The taxation of these funds is similar to actively managed debt funds. Indexation is available for long term capital gains.

Akin to fixed maturity plans (FMPs), these funds follow a roll-down strategy but in this case in an open-ended structure. Roll down simply means that a fund manager will construct a portfolio of securities with a defined maturity and allow the maturity to fall in line with the fund’s tenure.

“Target maturity debt index funds are meant for investors who are willing to stay invested till the fund’s maturity. The beauty of these funds is that they are simple roll down products with no active management thus making it very easy to track and predict the yields and investors do not face volatility if they stay invested till maturity. Since these index funds are open-ended in nature and invest in SDLs, PSUs and G-Secs one do not need to worry much about credit and liquidity risk along with this debt mutual funds provide great tax benefits,” says Rushabh Desai, Mumbai-based mutual fund distributor.

Viral Bhatt of Money Mantra says that these funds can be a good option for risk-averse investors looking for stable returns. “Fixed-income investors unnerved by the volatility in interest rates and looking for predictable returns with low credit risk in debt mutual funds could opt for target maturity schemes. Target maturity Funds hold a quality portfolio comprising government securities, PSU bonds and state development loans (SDLs). Hence, credit risk in these papers tends to be low. These products work as a good substitute for investors with a five-year-plus time horizon looking to earn more than bank fixed deposits.”

Rushabh feels that investors should stick to the short end of the yield and curve at this juncture. “Going forward we are expecting interest rates moving upwards in our economy and many medium to long-duration bonds will face comparatively higher mark-to-market volatility. Thus, investors will need to be careful and match their time horizon with the maturity profile of the fund. As the interest rates normalize, we will see bonds with higher yields eventually. It is advisable to stay invested towards the shorter end of the yield curve for some time and venture into medium to long-duration target maturity debt index funds with higher yields once we see some stability in the interest rates.”

Fund houses are positioning these funds as part of investors’ core portfolio. Some fund houses have introduced fund of fund versions which allows investors to invest in the underlying SDL ETFs without a demat account. While FOF is hassle-free option for investors, they have to shell out a little extra in terms of Total Expense Ratio (TER) due to its structure.

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