Diversification is the soul of investing. Those who invest in pure equity should really diversify across diverse asset classes — debt being the other key asset class. Debt as an asset class offers stability to your portfolio and also assists in periodic asset rebalancing. A couple of incidences of failure of some businesses to spend at the time of maturity of their papers have made investors and fund managers of debt funds extremely cautious and more cautious.
While investing in any debt solution, security, liquidity and reduce volatility are of paramount significance. For these who seek these components can take into account investing in PSU bond funds. In this post I want to talk about one such solution i.e. Funds based on Nifty PSU bonds plus SDL Sep 2027 60:40 index, which supply all these positive aspects in debt investments.
What is Nifty PSU Bonds Plus SDL Sep 2027 60:40 Index
The National Stock Exchange difficulties indices from time to time in the equity as nicely as debt category to assistance the mutual fund homes to replicate the identical and investors get an assurance about indicative returns. In the month of September 2021, NSE has notified an index in the debt category “Nifty PSU Bonds Plus SDL Sep 2027 60:40 Index”. This index comprises two components. One component constitutes of AAA-rated bonds of 8 Central government businesses and the other component has loan papers of major 20 state and Union Territories. The 1st component has 60% weightage whereas the second component of state development loan has the remaining 40%.
All the bonds and state loans will mature inside a period of one year prior to the 30th September 2027. So correctly the duration of any fund which replicates this index will have six years. Considering the reality that constituents of this index are AAA rated bonds and major states, the credit danger of investing in fund based on this index is practically eliminated.
Product offered for investors replicating this bond and SDL index
In order to provide investors the security of their debt investments and assurance about the indicative return, ICICI Prudential Mutual Fund has launched an index fund which will be benchmarked against the above NSE notified index. Since the fund proposes to retain the securities till its maturity, the investors can be assured of the indicative return of 6.28% if the investor holds his investments till maturity irrespective of any modify in the interest price in intervening period. Though the fund has a fixed maturity date of 30th September 2027, the fund is not a close ended scheme. Therefore in addition to offering safety and interest price assurance, it also supply investors significantly necessary liquidity simply because an investor can redeem his investments any time soon after the initial lock in period of 30 days. This feature tends to make this fund extremely desirable. The fund will mature on 30th September 2027.
Investing in debt funds is more tax effective than any other debt solution
All bond funds such as the funds replicating the above PSU bonds and SDL index are treated as debt funds for taxation purposes. Investments in debt fund becomes extended-term capital asset soon after it has been held for more than 36 months, else it is treated as brief term capital asset. Profits on sale of brief term capital assets are treated as brief term capital gains and such earnings on debt funds are taxed like your bank fixed deposits at your slab price. However, the extended term capital gains on such bond funds take pleasure in twin positive aspects which make them extremely tax-effective, specially these in the larger tax slabs.
Firstly, you are permitted to apply Cost Inflation Index (CII) to your expense of buy to compute your taxable extended-term capital gains, and the other advantage is that such extended-term capital gains soon after indexation are taxed at a concessional price of 20% against the maximum marginal price of 30%. The tax efficiency can be appreciated with the assistance of a hypothetical instance. Assuming you had invested Rs 1,000/- in each the merchandise: bond fund supplying 6.30% and the bank deposit six year ago i.e. in 2015. Based on the actual CII announced by the government in the previous, the efficient post tax returns on your bond fund are larger at 5.28% against 4.60% on bank FDs. In relative term, the post-tax returns of bond funds are larger by 26.37%, which is extremely substantial.
So, in case you are in larger tax slabs or want to have funds offered soon after six years and do not want to take the danger of default and interest price danger, the funds replicating the PSU Bond and SDL supply an superb investment chance.
(The author is a tax and investment professional, and can be reached at [email protected])