Mumbai: Debt funds based on assessing credit risks were in great demand a couple of years ago. And the winning formula was the riskier, the better. But that was then. Life has come a full circle in that segment of the market.
After the series of negative events in the fixed income space, conservative investors are keen to play it safe and are comfortable with PSU bonds or SDLs with no fund manager intervention.
“Passive index funds give you transparency, liquidity and visibility of returns with a low cost,” said Niranjan Avasthi, head-products, Edelweiss Mutual Fund. He points out that such funds are gaining traction among investors with assets under management moving up to ₹47,000 crore.
Distributors point out that investors save on expenses in passive debt funds, which increases their overall returns.
For example, in the medium-term debt fund category, the expense ratio in direct plans for schemes varies between 39-143 basis points. As compared to this, in passive debt funds it is 15-20 basis points.
Secondly, there is the visibility of returns in passive debt funds as they have a maturity date and on maturity, the investor is paid back the proceeds. In open-ended schemes, the returns earned could change and vary depending on the interest rate environment. Also, an investor gets back money only when he puts in a redemption request. These index funds also give investors liquidity with the ability to buy or sell as compared to fixed maturity plans (FMP) where they can only transact on the stock exchange.
Some financial planners believe investors can build a ladder around these products to give them both liquidity and returns.
“Conservative fixed-income investors can have a mix of passive debt schemes maturing over a 3-10 year time frame across different fund houses to diversify and optimise returns,” said Nirav Karkera, head of research, Fisdom. Karkera recommends investors adopt this approach to build a ladder.
If investors hold for three years and beyond they get indexation benefits which will significantly reduce their capital gains tax outgo.
For a 3-3.5 year horizon, Karkera recommends, the Bharat Bond Fund of Funds (FOF) maturing in April 2025.
For a five-year horizon, he suggests Aditya Birla Sun Life Nifty SDL Plus PSU Bond September 2026 60:40 Index Fund, which has 60% in PSU bonds and, for six years, IDFC Gilt 2027 Index Fund.
Karkera recommends the Bharat Bond FOF maturing in April 2030 and April 2031 for a 9-10 year time frame. Using these products investors can earn a return in the range of 5.5- 6.78%.