Should you invest in ‘Grandfather’ Debt Fund

Now, the MF industry is seeing a new crop of target maturity fund is being launched or is awaiting approval from the Securities and Exchange Board of India (SEBI). These funds are at the extreme end of long term maturity. IDFC MF and HDFC MF have applied for funds with maturities of 29 years and 40 years. These extremely long maturity schemes put ‘grandfather’ funds in question – which meet the time frame that can bring investors closer to retirement.

Edelweiss MF has launched Target Maturity Fund with maturity of 15 years. Edelweiss Crisil IBX 50:50 Gilt Plus SDL April 2037 will invest in a mix of Government Securities (G-Secs) and State Development Loans. IDFC MF has filed for Gilt Index Fund with maturity 2062, while HDFC has filed for G-Sec Fund with maturity of 2051.

Niranjan Awasthi, Head-Product, Marketing and Digital Business, Edelweiss MF, says, “The yield on the long-maturity segment is around 7.5%, which makes it attractive for investors in the long term.” “Inflation in India is currently around 7%, but once it comes closer to the 4% inflation target set by the Reserve Bank of India (RBI), investors will get good inflation-adjusted returns,” he says. The RBI in its ‘Monetary Policy Report September 2022’ said that inflation is likely to come down to 5.2% from the next financial year.

If you hold the fund till maturity, you are likely to get returns close to the indicative yield of the fund. The yield at maturity of 15 years is 7.51%. The current yield on G-Sec papers for 30 years maturity is 7.57%. If the fund takes some allocation to SDLs, the returns will be slightly higher. SDL bonds are issued by state governments and also come with a sovereign guarantee.

“If the customer is stuck for a long period, then such products are a good option. You are getting protection because these funds invest in sovereign papers, and if you hold for more than three years, your effective taxation is less than 10%,” says Vinod Jain, principal advisor, Jain Investment Planner.

Since longer tenures are sensitive to interest rate fluctuations, increasing the yield can have a mark-to-market effect on your investment if you need to withdraw money before maturity.

Investors looking to lock in yields over a long period of time can consider investing in such products.

Vikram Dalal, managing director of Synergy Capital Services, says the spread among papers with maturities of more than 10 years is not as wide as it should be. “These are good products, but investors can wait as the spreads widen, and then invest to lock-in on higher yields,” explains the broker.

Such products can also be used for annuity purpose by using systematic withdrawal plans, preferably after three years when long-term capital gains tax rates are applicable and you also get indexation benefit.