Investors have taken to safer debt funds categories over the past couple of years. Corporate bond and banking & PSU funds are preferred options for many investors. Since April 2019, banking and PSU bond funds have seen net inflows of Rs 55,423 crore. Jumping into the bandwagon, Mirae Asset is rolling out a Banking & PSU Debt fund. Its new fund offer (NFO) is open till July 20.
What is the fund about?
Mirae Asset Banking & PSU Bond Fund aims to invest at least 80 per cent of its corpus in securities issued by commercial banks, public sector undertakings (PSUs), public financial institutions (PFIs) and municipalities. The duration of the portfolio is expected to be 2-5 five years. The fund manager intends to use government securities depending on the interest rate outlook.
The fund has slowly and steadily been building its debt funds bouquet and has so far concentrated only on shorter tenure funds. With this new launch, Mirae takes baby steps into medium-term funds.
Mahendra Jajoo, Head-Fixed Income, Mirae Asset Investment Managers (India) will manage the scheme. The minimum investment is Rs 5000 and there is no exit load. The scheme will be benchmarked against the Nifty Banking and PSU debt Fund index.
The investment strategy ensures that the investors get to buy a bond portfolio with low credit risk. “Since the focus is on offering a low credit risk portfolio to investors, we will primarily invest in bonds with high credit rating issued by banks, PSUs and PFIs. The scheme is not likely to invest in perpetual bonds,” says Mahendra Jajoo, Head-Fixed Income, Mirae Asset Investment Managers (India).
The fund manager will actively manage the duration of the fund to benefit from possible capital appreciation opportunities.
Gains on investments in debt funds held for more than three years are taxed at 20.6 per cent after applying indexation. For investors in higher slabs, the post-tax returns delivered by bond funds may be better than those earned from a bank fixed deposit.
Banking & PSU Bond funds have delivered 11.01 per cent and 8.52 per cent returns over last one and three-year periods, according to Value Research data.
Increased demand for these bonds ensured that the prices of the bonds go up in a falling rate environment.
Yields on these bonds are down compared to a year ago. The yield-to-maturity of these funds is at 5.4 per cent on an average. “Investors must moderate their return expectations from these funds,” says Joydeep Sen, founder of wiseinvestor.in.
If the fund manager’s view on interest rates goes wrong, there may be volatility in returns.
Mirae Asset has done reasonably well with its fixed income portfolio in the recent past. The fund house has so far steered clear of credit events, when some peers have seen defaults on bonds held in their schemes’ portfolios. Though the fixed income schemes of the fund house do not top the performance charts, they have taken the balanced approach of earning healthy risk-adjusted returns.Since there are existing banking and PSU bond funds with performance track records, investors can skip this scheme. However, given Mirae’s track record of keeping its expense ratios low, there is a fair chance that this scheme may well come with a low expense ratio, especially in its direct plan. That’s something to look forward to in the future, if the scheme develops a good track record.