Edelweiss mutual fund is rolling out a passively-managed debt index scheme. Called the Edelweiss Nifty PSU Bond Plus SDL Index Fund-2026 (E26), this scheme is meant for those who wish to invest for approximately five years and get assured returns. Here’s what the fund is all about.
The scheme
E26 will invest in debt securities maturing on or before April 30, 2026. On that day, the scheme will mature and investors will get their money back. In other words, it comes with a specific or target maturity as such funds are known globally.
It will invest in AAA-rated bonds of government-owned companies (public sector units-PSUs), as well as state development loans (SDLs).
The scheme will seek to invest as much as possible in the securities that are a part of its benchmark, the Nifty PSU Bond Plus SDL Apr 2026 50:50 index.
But due to illiquid debt markets, the fund can choose other alternatives, as per the Securities and Exchange Board of India (SEBI) allow passively-managed debt funds some flexibility.
So, if the same securities aren’t available, debt index funds such as E26 can invest in other securities of the same company or state government. If that is not possible, the fund can buy another security of a different PSU or state government, from the index. As a last resort, it can also buy securities outside the index.
The underlying security’s duration or credit rating must be similar to that of the security the fund wishes to replicate. But, such investments cannot be more than 20 percent of scheme’s corpus.
Also, the fund may invest a bit more than half its portfolio in either SDLs or PSU bonds. “However, we will try to make sure the yield to maturity (YTM) of the fund largely matches that of the index, to avoid tracking errors. The share of PSUs and SDLs is not going to be widely different from that of the index,” says Radhika Gupta, managing director and chief executive officer, Edelweiss MF.
As per the scheme document, the tracking error is not expected to be more than two percent annually, under “normal circumstances.” It could be a bit high than what you’re used to seeing in equity funds because of the slight differences in valuation of debt securities.
Unlike Bharat Bond ETFs, Edelweiss AMC has chosen to take the index fund route for this scheme. Gupta says that the ETF is a government of India initiative that was also conceived to deepen the bond market as AMCs appoint market makers to create liquidity. An index fund, on the other hand, is meant to give retail investors an easy way of investing without a demat account.
What works
The credit risk in this fund is minimal as it invests in safe debt papers.
Vikram Dalal, managing director of Synergee Capital Services, says the fund aims to give returns that are better than those on tax-free bonds. “The 2025, 2026-dated bonds of PSUs are still quoting at 5.25-5.6 percent yields, but in SDLs you may even get a security with 6.5-6.7 percent yields,” Dalal adds.
Gupta also points out that yields on SDLs are quoting higher than the PSU bonds. “This is because of the larger borrowing program of state governments. Otherwise, SDL yields tend to be lower than bonds of PSUs. If these yields return to lower levels, it will add to the returns,” she says.
Gupta says the fund can potentially offer six percent post-tax returns. An analysis by Edelweiss MF suggests investors can make 6.12 percent compounded annualised returns over three years, even if yields rise by one percent point in this period.
A low expense ratio (0.15 percent on direct plans and 0.30 percent on regular plans) makes this among the least-expensive debt MF schemes.
What doesn’t work
A rise in bond yields – expected later this year – can be a dampener, if you wish to prematurely withdraw. “The fund will add value to your portfolio if you hold it till its maturity; otherwise, depending upon yield movement, the returns can be volatile,” says Ashish Chadha, a registered investment advisor.
Any disinvestment among E26 holdings will most likely trigger a rating downgrade, followed by fall in the bond price, as ratings will adjust for withdrawal of the government backing.
E26 will then have to rebalance its portfolio and rebalance it in the next quarter. Meanwhile, any deterioration in the ratings can cause a problem.
Moneycontrol’s take
Target-date maturity funds work well if you stick around till their maturity – April 30, 2026 in the case of E26. Holding your investments till maturity removes the interest rate volatility that can hit a debt scheme in its lifetime.
It remains to be seen how closely the fund will track its benchmark index. Gains from debt funds held for more than three years are considered long term in nature and enjoy indexation benefits. Given the potential returns and tax-efficiency, an allocation of up to five percent in this fund is fine. Make sure your investment horizon matches that of the fund.
E26’s NFO closes on March 16, 2021.
