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Should you invest in ‘grandfather’ funds?


1 trillion and growing. That is the worth of assets under management of the passive debt fund category. And within passives, target maturity funds have turned out to be a large category with assets of 65,000 crore, excluding the Bharat Bond ETFs.

Now, the MF industry is seeing a new crop of target maturity funds being launched or awaiting approval from the Securities and Exchange Board of India (Sebi). These funds are at the extreme ends of long-term maturities. IDFC MF and HDFC MF have filed for funds with 29-year and 40-year maturities.

Edelweiss MF has launched a target maturity fund with 15-year maturity. The Edelweiss Crisil IBX 50:50 Gilt Plus SDL April 2037 will invest in a mix of government securities (g-secs) and state development loans. IDFC MF has filed for a Gilt Index Fund with 2062 maturity, while HDFC has filed for a g-sec fund with 2051 maturity.


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“The yields on the longer maturity segment are hovering around 7.5%, which makes it attractive for investors in the long-term,” says Niranjan Avasthi, head-product, marketing and digital business, Edelweiss MF. “Inflation in India is currently around 7%, but once it comes closer to the 4% inflation target set by the Reserve Bank of India (RBI), investors would get decent inflation-adjusted returns,” he adds. The RBI in its ‘Monetary Policy Report September 2022’ said that inflation is likely to come down to 5.2%, from next financial year.

If you hold the fund till maturity, you are likely to get returns closer to the indicative yield of the fund. In the 15-year maturity, the yield is at 7.51%. For the 30-year maturity, the current yield on g-sec papers is at 7.57%. If the fund takes certain allocation to SDLs, the yield will be slightly higher. SDL bonds are issued by state governments and also come with a sovereign guarantee.

“If the client is staying put for a longer term, such products are a good option. You are getting safety as these funds invest in sovereign papers, and if you hold for over three years, your effective taxation is less than 10%,” says Vinod Jain, principal adviser at Jain Investment Planner.

As longer duration is sensitive to interest rate movements, rising yields could lead to mark-to-market impact on your investments if you need to withdraw before maturity.

Investors looking to lock yields over the longer term can consider putting money into such products.

Vikram Dalal, managing director at Synergee Capital Services, says the spreads between higher maturity papers beyond 10-years is not as wide as they should be. “These are good products, but investors can wait as spreads might widen, and then invest to lock-in at even higher yields,” Dalal points out.

Such products can also be used for annuity purpose by using systematic withdrawal plans, preferably after three years when long-term capital gains tax rates apply and you also get indexation benefit.

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