We have all heard the saying “Don’t put all your eggs in one basket. It stresses the importance of diversification. Diversification is the most important part of your investment journey. Most investors generally divide their investments into two main asset classes.” : Equity and Debt. Lately, investing in debt has become traditionally risky. Hence, while investing in the debt portion of your portfolio, you should invest in products that offer investment opportunities. Provides safety, liquidity as well as some stability in terms of returns. One of the debt products that fulfills all these qualities is Nifty PSU Bond Plus SDL Sep 2027 60:40 Index Fund.
What is Nifty PSU Bond Plus SDL Sep 2027 60:40 Index?
The National Stock Exchange, popularly known as NSE, is setting up various equity and debt indexes that the mutual fund industry can rely on to benchmark its products. One such debt index is Nifty PSU Bond Plus SDL September 2027 60:40 Index. Based on this index, product makers may consider launching an index fund that tracks this offering as its underlying index. The general understanding when launching such an index based product is that the returns generated by the product will also be the same as the underlying index.
The Nifty PSU Bonds Plus SDL September 2027 60:40 Index comprises two components: 40% is represented by bonds issued by Public Sector Undertakings (PSUs) and 60% by State Development Loans (SDLs). The PSU bonds that are part of this portfolio are AAA rated bonds issued by eight different central government PSUs. When it comes to SDLs, the portfolio consists of papers issued by the top 20 states and union territories. Each of these bonds and SDL is such that it will mature within a period of one year ending September 30, 2027. Since the constituents of this index are top rated PSUs that come with sovereign and state guarantees, the credit risk offering associated with this loan is almost non-existent.
Product that repeats this index
Considering the quality of this loan offering, fund houses are launching products based on this index to pass on the benefits to the investors. Recently, ICICI Prudential Mutual Fund announced the launch of a passively managed loan offering based on this index. Though the investment under this scheme will be made in those securities maturing between October 01, 2026 and September 30, 2027, the fund will be of open ended nature, which means that the investor can invest his or her investments at any time after the 30-day lock. You can buy and redeem. -In time. Not only does the offering have sufficient liquidity, but one can also be assured about the yield that will be generated from the offering.
Since the fund intends to hold the underlying securities till maturity, an investor who requires funds around September 2027 may consider investing in such a fund. Such targeted investments help investors avoid interest rate risk over the period.
Tax potential of debt funds over traditional fixed income options
From the point of view of taxation, Nifty PSU Bond Plus SDL Sep 2027 60:40 Index will be treated as Debt Mutual Fund. Investment in such product would be considered long term if held for more than 36 months. Any period less than 36 months will be treated as short term and profits will be taxed as short term capital gain as per your applicable tax slab rate. In the case of long-term capital gains, an investor is entitled to apply a cost inflation index to the cost of your investment which effectively multiplies the cost for the purpose of computing your long-term capital gains. The indexed capital gains thus computed are taxed at the same rate of 20%, irrespective of the slab rate applicable to you.
Due to the twin benefits of indexation and a concessional tax rate of 20%, investing in debt funds is very tax efficient as compared to investing in bank fixed deposits. For example: Let’s say you had invested Rs. 10,000 each in a debt fund and in a fixed deposit in the year 2015, both are earning the same rate of interest. For computing the indexed cost and 20% tax rate on such bond funds, on the basis of previous cost inflation index for the last six years and comparing it with the tax of 30% on bank fixed deposit interest, The net annual return after tax of the fund and fixed deposits would have been around 5.82% and 4.60% respectively. In the case of bond funds for full six years, the absolute difference of 1.21% after tax returns is roughly 26.37% higher.
To conclude, if you are an investor looking for diversification within the debt component or want to provide a fixed amount at the end of the target period along with liquidity as bonus, you can look at Nifty PSU Bonds and SDLs. You can consider investing in based funds. Sep 2027 60:40 Index to maximize your overall returns.
Balwant Jain is a tax and investment expert and can be contacted at jainbalwant@gmail.com. He can also be contacted on his Twitter handle @jainbalwant.
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