Mutual Funds

NFO - SBI and Axis Target Maturity Funds

Maulik Madhu | Updated on: Jan 12, 2022
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Target Maturity Funds are ideal for investors who want some return predictability and have an investment goal that matches the maturity of the fund

BL Research Bureau

Target Maturity Funds (TMFs) are debt funds with a defined maturity - that invest passively in the bonds of a particular index holding them till maturity – thereby providing some return predictability. The interest received on these bonds gets re-invested in similar bonds held until maturity. However, the fund may sell its bond holdings to meet redemptions, if needed. All existing TMFs track indices composed of AAA-rated corporate bonds, g-secs (central government bonds), SDLs (state development loans) or a combination of these, making them high credit quality funds. SDLs are debt papers issued by state governments and carry an implicit sovereign guarantee.

What’s on offer ?

SBI MF has launched its CPSE Bond Plus SDL Sep 2026 50:50 Index Fund, a target maturity fund (TMF). The new fund offer is open until January 17, 2022.The SBI CPSE Bond Plus SDL Sep 2026 50:50 Index Fund will track the Nifty CPSE Bond Plus SDL Sep 2026 50:50 Index, which is an equal mix of AAA-rated bonds issued by government-owned entities and SDLs, all maturing between September 2025 and 2026. Each of the AAA-rated bond issuers and the selected state governments (issuers of SDLs) have been assigned equal weightage within their 50 per cent share in the index making the portfolio well-diversified.

Today, the scheme is offering a yield to maturity (YTM) of 6.05 per cent approximately. That is, if you invest in the scheme today and stay put till its maturity in September 2026, your return will be 6.05 per cent minus the expense ratio. If you invest later, then the YTM at that point in time will indicate your return on maturity. If you exit the scheme before its maturity, your return will differ from that indicated by the YTM, depending on how interest rates have moved since you invested. The expense ratio for SBI MF’s TMF will be known after the NFO closes. Other TMFs with similar portfolios and YTMs include the Axis AAA Bond Plus SDL ETF – 2026, Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 2026 and Edelweiss NIFTY PSU Bond Plus SDL Index Fund – 2026 have expense ratios of 0.13 – 0.16 per cent.

Axis MF has also launched its CPSE Plus SDL 2025 70:30 Debt Index Fund, a target maturity fund (TMF) on January 10. The NFO (new fund offer) will remain open until January 20, 2022.

The scheme will track the CRISIL IBX 70:30 CPSE Plus SDL - April 2025 and matures on April 30, 2025 - that is, around 3 years from now. If you remain invested until maturity, your indicative return will be 5.75 – 5.95 per cent YTM, depending on the yields prevailing at the time of cash deployment, minus the expense ratio. The CRISIL IBX 70:30 CPSE Plus SDL - April 2025 index is a 70:30 mix of AAA-rated CPSE bonds and SDLs (state development loans) maturing within six month of April 30, 2025. The selected CPSE bonds and SDLs will be assigned 70 per cent and 30 per cent weight, respectively, at the time of inception.

Axis MF’s latest TMF is similar in composition to its earlier launched, Axis AAA Bond Plus SDL ETF – 2026 which matures in 2026 and has 50:50 exposure to AAA-rated corporate bonds and SDLs. The scheme has a YTM of 6.12 per cent.

Invest or not?

TMFs are ideal for investors who want some return predictability and have an investment goal that matches the maturity of the fund, and these funds can be especially attractive (compared to say, fixed deposits) for those in the higher tax brackets. If you redeem your investment in a TMF, which is a debt fund, after three years, your return (capital gains) gets taxed at 20 per cent with indexation benefit. Interest income on fixed deposits, on the other hand, is taxed at your income tax slab rate.

With interest rates expected to gradually move upwards, there is a possibility of capital loss (a fall in the price of existing bonds in the fund portfolio) impacting your returns on premature exit. So, be prepared to stay invested until maturity. Also, as the rate cycle turns up, other higher-return investment options, including TMFs with better YTMs may emerge. So, do not park a substantial portion of your investible surplus in longer maturity products, TMFs or otherwise, and keep a portion that can be liquidated easily to be reinvested at better rates.

Published on January 12, 2022

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