Edelweiss MF launches India’s first passive short-term index fund; Will it work?

The NFO for Edelweiss CRISIL IBX 50:50 Gilt Plus SDL Short Duration Index Fund opened on January 27.

Edelweiss Asset Management has launched a new fund offer (NFO) for India's first open-ended passive short-duration index scheme. Called Edelweiss CRISIL IBX 50:50 Gilt Plus SDL Short Duration Index Fund, the scheme will invest in a diversified portfolio of Indian Government Bonds (IGBs) and State Development Loans (SDLs).

The NFO for Edelweiss CRISIL IBX 50:50 Gilt Plus SDL Short Duration Index Fund opened on January 27, 2023.

Edelweiss Mutual Fund is a leader in the passive debt fund category with the highest market share managing assets of over Rs 68,000 crore (as on December 31, 2022).

What’s on offer?

The scheme will invest 50 percent of its funds in IGBs and the rest in SDLs. The G-Sec portion will be constructed by selecting the most liquid government bonds with a minimum outstanding of Rs 10,000 crore falling in duration buckets from one year to five years.

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The SDL portion will be constructed by first selecting the most liquid state issuers falling in each of the eligible duration buckets and then by selecting the most liquid ISIN (security) from each of these buckets with a minimum outstanding of Rs 500 crore. The benchmark of the scheme, the CRISIL IBX 50:50 Gilt Plus SDL Short Duration Index, has exposure to SDLs of Rajasthan, Gujarat and Karnataka.

The modified duration of the fund would be 2.63 years and yield-to-maturity (YTM) of 7.34 percent and a net YTM of around 7.19 percent.

The index would be rebalanced every quarter with an effective date as the first business day of the month.

The fund managers of the scheme are Dhawal Dalal and Rahul Dedhia.

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Radhika Gupta, Managing Director and Chief Executive Officer, Edelweiss AMC, said, “The idea was to create a very simple product, which is low-cost and has no credit issues because it contains government securities and SDLs and is constant duration. So you don't have to worry about rolling it over again and again, like target maturity. It is a simple short-term parking vehicle, like your friendly bank account.”

What works

The expense ratio for the fund is in the range of 10-15 basis points under the direct plan, which is much lower than the average expense ratios of other short-term and low-duration funds.

“In fixed income, a lower cost of a fund matters a lot. So that's a big plus for this product,” said Kirtan Shah, founder and CEO of Credence Wealth Advisors LLP.

Vidya Bala, Cofounder of PrimeInvestor.in, believes that this fund is suitable for any kind of debt investor wanting to invest for a minimum of two-three years.

Experts also say that with interest rates expected to top off soon, this would be an ideal time to lock into current yields for those looking at the debt space now.

What doesn’t work

Experts say that SDLs have a market liquidity risk with fixed rate SDLs compared with corporate bonds.

However, Gupta countered by saying, “We run a very large book of SDLs, because of our passive debt business and we don't find a challenge in either buying or managing SDLs. Of course, the liquidity of the index is such that we have adequate choices, and we pick the most liquid SDL. So it's not something we worry about.”

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Further, experts warn that somebody with a one-year view should not invest in this product.

“Short-term funds carry interest rate risk too. This fund probably makes sense today, for those who wish to stick around for 2-3 years, assuming interest rates would go down. When rates go down, prices of bonds go up and that is how these funds make money. But what if rates do not go down? Instead, what if they go up? In such a scenario, those coming in with a one-year time horizon, at this point of time, would not get the YTM,” says Shah.

What should investors do?

In recent years, passive funds, due to their low-cost structure have been competing with active debt funds.

“However, calculated and marginal credit risk that is done with active funds, does hold the ability to deliver more. Hence, both can co-exist for lowering portfolio risk and also delivering superior returns,” said Bala.

CRISIL IBX 50:50 Gilt Plus SDL Short Duration Index Fund can be a part of any long-term portfolio. But make sure this isn’t your only debt allocation. If you have a 2-3 years time horizon, then you can consider adding this fund to your portfolio.

The NFO will close on February 10, 2023.