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After successfully launching the Bharat Bond ETF series of debt index funds, Edelweiss Mutual Fund (MF) chief executive Radhika Gupta has trained her sights on customers who don’t have an investing time frame in mind. “For investors who want to keep money for 1-3 years but don’t know exactly when they will redeem it, an open-ended index fund is a good option," she said.

Target maturity funds have taken off as a category in the debt mutual fund space over the last three years. Bharat Bond ETFs alone have assets of around 54,000 crore. These are funds that are benchmarked to an index and mature on a particular date. They buy and hold bonds maturing on that date without taking duration or credit calls. These funds are designed to give the investor visibility of return which is close to the yield of the fund at the time of investing. However, Gupta feels that an open-ended fund without any end maturity may be more appropriate for customers who don’t have a specific time horizon in mind and want to just invest money without any end-use in sight.

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Graphic: Mint

Gupta sees active open-ended debt funds suffering from multiple drawbacks. “Historically, they have not been efficient at taking both duration and credit calls," she says. Higher duration makes a debt fund more sensitive to interest rates—this can help during rate cuts but hurt when interest rates rise.

“Active funds are seen on an average minimizing duration when interest rates are peaking and maximizing at a time the interest rates are bottoming out and this leads to poor outcomes. This is what their history shows. They have also suffered from credit incidents in the past. The number of debt fund categories are also complicated—low duration, short duration, corporate bond, banking and PSU debt. These have different duration and credit strategies. So, which of these do you choose from? A simple index fund might do the best job at the lowest cost. Instead of paying around 0.5-1% in these active funds, you pay just 0.10-0.15% in passive index funds," she added.

Edelweiss Crisil IBX 50:50 Gilt plus SDL Short Duration Index Fund aims to maintain a duration of around 2.5-3 years. As the name suggests, it will split its portfolio 50:50 between Central government bonds and state government bonds. The most traded (liquid) bonds will be purchased. The index that the fund will track, as outlined in an Edelweiss MF presentation, bonds issued by Rajasthan, Karnataka and Gujarat will be present. The index to which the scheme is benchmarked has an indicative yield (as of 1 January 2023) of 7.34% and a modified duration of 2.63. The New Fund Offer (NFO) for the scheme opens on 27 January.

Experts have approached the new fund with caution, “Allocate only a portion to short end in your debt MF basket. If investment horizon permits, choose active funds with a long duration side, now that interest rates appear to be peaking out. A short duration index fund will not help you benefit from rate cuts, when they eventually come," said Amol Joshi, founder, Plan Rupee Investment Services. “I also feel that the expense ratio gap is not that significant when compared to other high credit quality schemes available in short duration options," he added.

ABOUT THE AUTHOR

Neil Borate

Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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