Investors now find debt index funds safe and attractive

• Follow

Debt funds based on credit risk assessment were in high demand a few years ago. And the winning formula was that the greater the risk, the greater the reward.

Debt index funds are again gaining popularity due to their portfolio of AAA-rated PSU bonds and state bonds, known in the market as state development loans (SDL).

Following a string of unfavourable occurrences in the fixed-income industry, conservative investors prefer to play it safe and are content with PSU bonds or SDLs that do not require fund management intervention.

The Economic Times has quoted Niranjan Avasthi, head-products, Edelweiss Mutual Fund, as saying that passive index funds provide transparency, liquidity, and return visibility at a reasonable cost.

Debt index funds

Investors in passive debt funds save money on expenditures, which enhances their overall returns, according to distributors.

The expense ratio in direct plans for schemes in the medium-term debt fund category, for example, ranges from 39 to 143 basis points. In comparison, it is 15-20 basis points in passive debt funds.

Second, passive debt funds provide visibility of returns because they have a maturity date and the investor is paid back the proceeds at that time. The returns received in open-ended plans may shift and vary depending on the interest rate environment.

Furthermore, an investor only receives money back when he submits a redemption request. These index funds also provide investors with liquidity by allowing them to buy and sell, as opposed to fixed-maturity plans (FMPs), which only allow them to trade on the stock exchange.

The report quoted some financial planners as feeling that investors might construct a ladder around these products to provide liquidity as well as rewards.

Investors who retain for three years or longer receive indexation benefits, which lower their capital gains tax bill significantly.

The report quoted Karkera as suggesting that the Bharat Bond Fund of Funds (FOF) is due in April 2025 for a 3-3.5 year horizon.

The report quoted him as recommending Aditya Birla Sun Life Nifty SDL Plus PSU Bond September 2026 60:40 Index Fund for a five-year horizon and IDFC Gilt 2027 Index Fund for a six-year perspective.