What are PSU bond funds? Should we invest?

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We’ve all heard of the saying “Don’t put all your eggs in one basket”. This highlights the importance of diversification. Diversification is the most important part of your investment journey. The majority of investors generally diversify their investments into two main asset classes. : Equities and debt. In recent times, investing in debt has become riskier than it traditionally has been. So, while investing in the debt portion of your portfolio, you should invest in products that offer investment security, liquidity as well as some stability in One of the debt products that fulfills all of these qualities is the fund. Nifty PSU index plus SDL Sep 2027 60:40.

What is the Nifty PSU Bonds Plus SDL Sep 2027 60:40 Index

The National Stock Exchange, known as the NSE, has instituted various equity and debt indices that the mutual fund industry can rely on to compare its products. One of these debt indices is the Nifty PSU Bonds plus SDL Sep 2027 60:40 Index. Based on this index, product makers may consider launching an index fund that replicates this offering as an underlying index. The general understanding when launching such an index based product is that the returns generated by the product will also be very close to those of the underlying index.

This Nifty PSU Bonds plus SDL Sep 2027 60:40 index has two components: 40% represented by bonds issued by public sector enterprises (PSUs) and 60% represented by government development loans (SDL). The PSU bonds that are part of this portfolio are AAA rated bonds issued by eight different central government PSUs. Regarding LDS, the portfolio includes articles published by the top 20 States and Union Territories. Each of these bonds and SDL is such that it will mature within one year ending September 30, 2027. Since the constituents of this index are blue chip PSUs backed by sovereign and government guarantees , the credit risk associated with this debt supply is almost non-existent.

Product that replicates this index

Given the quality of this debt offering, fund houses are launching products based on this index so that investors can benefit from it. Recently, ICICI Prudential Mutual Fund announced the launch of a passively managed debt offering based on this index. Although investments under this program are made in securities maturing between October 1, 2026 and September 30, 2027, the fund will be open-ended, meaning that investors can buy and redeem their investments at any time. time after the 30 day lockout. -in period. Not only is the offer sufficiently liquid, but one can also be assured of the return that the offer can generate.

Since the fund intends to hold the underlying securities to maturity, an investor who needs funds around September 2027 may want to consider investing in such a fund. Such a targeted investment helps investors to circumvent interest rate risk during the period.

Tax efficiency of debt funds compared to traditional fixed income options

From a tax perspective, the Nifty PSU Bonds Plus SDL Sep 2027 60:40 Index will be treated as a debt mutual fund. Investment in such a product will be considered long term if held for more than 36 months. Any duration less than 36 months will be treated as short term and the profits will be taxed as short term capital gains at your applicable tax rate. In the case of long-term capital gains, an investor has the right to apply a cost inflation index to the cost of your investments, which effectively increases the cost for the purposes of calculating your long-term capital gains. The indexed capital gain thus calculated is taxed at the flat rate of 20% regardless of the slab rate applicable to you.

Due to the dual advantage of indexation and the 20% preferential tax rate, investing in a debt fund is very tax-efficient compared to investing in term bank deposits. For example: suppose you invested Rs. 10,000 each in a debt fund and a fixed deposit in 2015, both producing a similar interest rate. On the basis of the cost inflation index passed over six years to calculate the indexed cost and the 20% tax rate on these bond funds and comparing the same with the 30% tax on the interest of fixed bank deposits, the after-tax net annualized returns on these bonds, funds and term deposits would have been approximately 5.82% and 4.60%, respectively. The absolute difference of 1.21% equates to about 26.37% more after tax returns, in relative terms, in the case of bond funds if they are held for six full years.

To conclude, if you are an investor looking for diversification within the debt component or want to have a certain amount at the end of a targeted period with bonus cash, then you may want to consider ‘invest in a fund based on Nifty PSU Bonds plus SDL Sep 2027 60:40 Index to maximize your overall returns.

Balwant Jain is a tax and investment expert and can be contacted at [email protected] He can also be contacted on @jainbalwant his Twitter ID.

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