Mutual Funds

Should you invest in SBI MF’s latest target maturity NFO?

Maulik Madhu | | Updated on: Jan 04, 2022
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SBI CPSE Bond Plus SDL Sep 2026 50:50 Index Fund can offer close to 6 per cent on maturity in 2026

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.

Asset management companies in India have launched several TMFs over the past year. 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

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.

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, September 2026 in the case of the SBI MF’s TMF. 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 04, 2022

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