DSP’s target maturity fund will invest in state development loans, but with a twist. Should you invest?

DSP Mutual Fund has launched Nifty SDL Plus G-Sec Jun 2028 30:70 Index Fund, which is a target maturity fund that will invest in a portfolio of government securities and state development loans.

The scheme

The fund will invest 70 percent of its portfolio in government securities, while 30 percent will be invested in state development loans. As the name suggests, the fund will be maturing by 2028, so the fund’s debt investments will also be in debt papers that mature by then. Yields on the G-secs are peaking in the six-seven maturity bucket and then flattening out.

For selecting the securities of state development loans (SDLs), DSP Mutual Fund has worked with the index provider to build in a quality filter, apart from a liquidity filter. This will filter SDLs of those states which have the best scores in terms of their GDP-to-total liabilities. So, the portfolio will have G-sec papers, which are usually liquid, as well as SDLs that have better financials and liquidity.

"Having better quality of SDLs will help the portfolio, especially during times of low liquidity in debt markets," says Sandeep Yadav, head of fixed income, DSP Mutual Fund.

What works?

The scheme is likely to come with a low expense ratio of 15 basis points, which is important in a target maturity debt fund.

“A low expense ratio will have minimal impact on investor returns,” points out Vikram Dalal, managing director of Synergee Capital.

The fund will track the Nifty SDL Plus G-Sec Jun 2028 30:70 Index Fund, which is offering yield to maturity of 6.7 percent.

However, there can be some tracking differences that investors will have to watch out for.

If you invest in the fund before March 31 or in the NFO, you will get benefit of seven years of indexation on your long-term capital gains.

Also read: As rates harden, are target maturity funds better than regular debt schemes?

“You can get post-tax returns of 5.6-5.8 percent over the seven-year period,” Dalal says.

What doesn’t work?

While it is an open-ended fund, if investors withdraw their investments before the fund’s maturity, they might not get the expected returns.

A rise in bond yields that is expected to pick up further during the year can be a dampener on the returns, if you wish to prematurely withdraw. While the impact on SDLs can be higher as spreads are at record lows, but the fund has lower exposure to SDL at 30 percent. Most of the other G-sec plus SDL funds out there have kept 40-50 percent exposure to SDLs.

While G-secs come with a clear sovereign guarantee, SDLs come with an implicit sovereign guarantee. This is also the reason why the SDL portion of the index yields slightly higher at 6.9 percent than the G-sec portion at 6.6 percent.

However, the quality filter in the index should be able to avoid bonds of state governments that have weaker financials.

Moneycontrol’s take

The returns being offered by the fund post-tax are better than tax-free bonds, which are currently yielding around 4.6 percent, as well as bank fixed deposits where there is no benefit of indexation. You can also use these funds to park any maturity proceeds that you might be getting from tax-free bonds maturing this month. Investors looking for avenues to park their surplus funds for 6-7 years can consider this fund. You can invest in the NFO period which closes on March 17 or before March 31 to take benefit of an additional year of indexation.