We have all heard about the saying ‘Don’t put all your eggs in one basket’. This stresses on importance of diversification. Diversification is the most important part of your investment journey. Majority of investors generally diversify their investments across two main asset class: Equity and Debt. Of late investing in debt has become riskier than what it has traditionally been. So, while investing in the debt portion of your portfolio, you should invest in products which offer safety of investments, liquidity along with some stability in terms of returns. One of the debt products which fulfills all of these qualities is the Nifty PSU bonds plus SDL Sep 2027 60:40 index fund.
What is Nifty PSU Bonds Plus SDL Sep 2027 60:40 Index
The National Stock Exchange, popularly known as the NSE has been instituting various equity and debt indices which the mutual fund industry can rely on to benchmark their products. One such debt index is the Nifty PSU Bonds plus SDL Sep 2027 60:40 Index. Based on this index, product manufacturers can consider launching an index fund which tracks this offering as its underlying index. The general understanding when launching such an index based product is that the returns generated by the product will also closely resemble that of the underlying index.
This Nifty PSU Bonds plus SDL Sep 2027 60:40 Index comprises of two constituents: 40% represented by Bonds issued by Public Sector Undertakings (PSUs) and 60% represented by State Development Loans (SDL). The PSU bonds which form a part of this portfolio are AAA rated bonds issued by eight different central government PSUs. When it comes to SDLs, the portfolio comprises of papers issued by top 20 states and Union Territories. Each of these bonds and SDLs are such that it will all mature within a period of one year ending September 30, 2027. Since the constituents of this index are top rated PSUs which come with sovereign and state guarantees, the credit risk associated with this debt offering is almost non-existent.
Product which replicates this index
Given the quality of this debt offering, fund houses are launching products based on this index such that investors can benefit from it. Recently, ICICI Prudential Mutual Fund announced the launch of a passively managed debt offering based on this index. Though the investments under this scheme will be made in securities which are maturing between October 01, 2026 and September 30, 2027, the fund will be open ended in nature which means investors can buy and redeem their investments anytime they please post the 30 day lock-in period. Not only is there sufficient liquidity in the offering, one can also be rest assured of the yield the offering can generate.
Since the fund intends to hold the underlying securities till maturity, an investor who needs funds around September 2027 can consider investing in such a fund. Such targeted investing helps the investors circumvent the interest rate risk during the period.
Tax Efficiency of Debt funds over traditional fixed income options
From a taxation perspective, Nifty PSU Bonds Plus SDL Sep 2027 60:40 Index will be treated as a debt mutual fund. Investment in such a product will be considered as long term if held for more than 36 months. Any duration lesser than 36 months will be treated as short term and profits will be taxed as short term capital gains as per your applicable tax slab rate. In case of long term capital gains, an investor is entitled to apply cost inflation index to cost of your investments which effectively increases the cost for the purpose of computing your long term capital gains. The indexed capital gain so calculated is taxed at flat rate of 20% irrespective of slab rate applicable to you.
Due to the dual benefit of indexation and concessional tax rate of 20%, an investment in a debt fund is very tax efficient as compared to investments in bank fixed deposits. For example: Assume you had invested Rs. 10,000 each in a debt fund and in a fixed deposit in the year 2015, both yielding similar rate of interest. Based on the past Cost Inflation Index for six years for computing the indexed cost and rate of tax of 20% on such bond funds and comparing the same with tax of 30% on bank fixed deposit interest, the net after tax annualised returns of such bonds funds and the fixed deposits would have been around 5.82% and 4.60% respectively. The absolute difference of 1.21% works out to around 26.37% higher after tax returns, in relative terms, in case of bonds funds if held for full six years.
To conclude, if you are an investor looking for diversification within the debt component or wish to have a certain amount available at the end of a targeted period with liquidity as bonus, then you can consider investing in a fund based on Nifty PSU Bonds plus SDL Sep 2027 60:40 Index to maximise your overall returns.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com. He can also be reached on @jainbalwant his twitter handle.
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