Edelweiss AMC is launching a NFO, which is set to open for subscription from March 10th, 2021 and closes on March 16th, 2021.
Investment Objective: To generate better returns than a fixed deposit/corporate deposit in the medium to long term, suitable for investors having a moderate risk appetite who are comfortable with mild short term volatility.
Investment Strategy: The fund has a specified allocation to fixed income instruments with intricate filters to enhance credit quality and liquidity. The fund replicates the index which consists of bonds issued by Public Sector Units(PSU) as well as State Development Loans(SDL). The fund has a unique strategy named target maturity, wherein the investment proceeds will be given back to the investor once the fund attains maturity. The focus is to generate higher returns than an ultra short/low duration debt fund by giving larger exposure to longer duration securities of bonds primarily backed by PSUs and SDLs.
Fund Manager: Dhawal Dalal and Gautam Kaul
Benchmark: Nifty PSU Bond Plus SDL Apr 2026 50:50 Index
Recommended Time Horizon: 5 years
Minimum Lumpsum Investment Amount: Rs 5,000
Minimum SIP Investment Amount: Rs 1,000
- Prime alternative to fixed deposits
- Investors having moderate risk capacity
- Investors who are nearing retirement or have already retired
- Investors who are looking to preserve their wealth
- Investors looking to park their money for medium term goals (5 years)
The strategy of having a target maturity not only allows investors to get back their investment proceeds in a definite timeframe but also aids in possible capital appreciation. This is one of its kind in Indian Debt Mutual Fund space as schemes do not return the investment amount unless and until redemption is placed.
Credit risk is comparatively very negligible as the portfolio is constructed with AAA rated Bonds of PSU along with SDLs in a predefined proportion. The Index has equal weights(50-50) assigned to PSUs and SDLs with currently 21 holdings in total. Since it has prefixed weights assigned to each category, the bonds in the portfolio are also evenly spread.
Also, if one is looking to park their capital for a minimum of three years with the expectations of protecting their wealth similar to a fixed deposit, then this debt fund is a clear winner as they not only provide better returns but also give remarkable tax benefits in the form of Indexation. Indexation helps in increasing the original cost of the debt fund by adjusting it to prevalent inflation, thereby reducing the overall gains while selling, resulting in lower taxes on the profits made.
Fund Management Process:
- Selection criteria is purely from the universe of fixed income instruments.
- The fund is passively managed and will directly replicate the Nifty PSU Bond Plus SDL Apr 2026 50:50 Index
- Proportion of each holding in the portfolio is predefined and is equal weighted(50-50) to PSU Bonds and SDLs
- The fund undergoes rebalancing on a quarterly basis
Based on our analysis, we have observed the following pros and cons
- No fund manager bias or human intervention
- No lock-in period
- Scope for higher returns when compared to other options like Fixed Deposits in the longer run
- Highly transparent as it replicates the Index
- Tremendously tax efficient over a period of more than 3 years due to Indexation
- Extremely low or minimal credit risk
- Quite sensitive to interest rate movements
- Volatility in the short term can be high
- PSUs are subject to privatization and that can alter the credit ratings of these bonds
Debt Mutual Funds as a product are generally used for wealth preservation with an expectation of having slightly better returns than savings bank/fixed deposit. Target Maturity + Index theme is a completely new category of investments in the Indian debt mutual fund space, with quality and safety as priority, but at the same time, exposes itself to moderate volatility caused by interest rate fluctuations due to longer duration of maturity.
It is good to diversify by allocating some amount of portfolio into this fund for moderate returns and capital protection but investors should make sure there are substantial investments in Equity Mutual Funds as per their risk appetite, as they have a greater capacity of delivering inflation beating returns in the longer run. It is of utmost importance that the fund should be discussed with your financial advisor and then ascertain whether it is suitable to invest. Always read the scheme documents fully before investing.