IDFC Gilt Index Funds review: Should you invest in the NFOs?

After Edelweiss rolled out its debt index fund last week,  IDFC Mutual Fund (MF) has now launched two government securities (G-sec) index schemes. One will mature in 2027 (June 30) and the other in 2028 (April 5).

The scheme   

Both g-sec index funds would be passively managed. They are benchmarked against two gilt indices – CRISIL Gilt 2027 and 2028 indices. And they will invest their assets in g-secs and treasury bills. The allocation would almost be in the same proportion as the benchmark indices.

Being target maturity products, they can only invest in debt securities that mature on or before the maturity dates of the schemes.

The scheme information document filed by IDFC MF says that “under normal circumstances, tracking error is not expected to exceed 2 percent per annum.”

What works

Although interest rates are low at the moment, the medium-term rates are reasonably higher. These two g-sec funds lock your money at these rates, which bodes well for you. Presently, the liquidity support provided by the RBI is keeping yields at the shorter-end of the curve lower.

Also read: Explained: What is a yield curve

“So, a spike in yields may not be as sharp on these maturities, as they are on the shorter-end of curve. Also, the potential benefit of a roll-down strategy could mitigate the impact of rising yields on these funds,” says Anurag Mittal, fund manager at IDFC MF.

In a roll-down strategy of bond funds, the portfolio’s yield keeps decreasing as we get closer to the maturity. So, even if the interest rates rise, the passive management ensures that your fund isn’t impacted much.

In fact, if you stay invested till maturity, you also lock into higher yields at the start. As per an illustration by IDFC MF, the 2028-fund can give compounded annualised returns of 5.78 percent if yields move up by 100 basis points over this period. Over five years, the returns are 6.49 percent – the longer you stay invested, the better.

Vinod Jain, principal adviser at Jain Investment Planner, says investors staying on till the maturity of the product could get 5.5-5.6 percent post-tax returns.

“With the RBI targeting at keeping inflation at four percent, these are good returns. However, only investors that are willing to stay for the longer-term should invest in this fund, as changes in interest rates can lead to sharp volatility in gilt funds in the short term,” he says.

The schemes also do not carry credit risks as they invest in g-secs.

The scheme comes with a low expense ratio: 15 basis points (bps) for the direct plan and 40 bps for the regular option.

What doesn’t work?

Since target maturity funds work if you stay invested till maturity, investors withdrawing funds over the shorter-term may see sharper impact on their investments, if interest rates start to move up.

Gilt funds, especially those investing in longer maturities, are more sensitive to the interest-rate cycle. So, the volatility in such funds can be higher.

Also read: How you can profit from gilt funds’ fluctuating fortunes?

Only if the target maturity funds are held till their maturities, will the interest-rate risk be reduced or eliminated.

Moneycontrol’s take

Investors wanting to take exposure to a low-risk option for the long term can opt for either of the two schemes. After adjusting for inflation, the fund’s potential returns are expected to be reasonable.

Both offers close on March 19, 2021.