Can I invest in SBI CRISIL IBX Gilt Index – June 2036 Fund for a long-term goal?

Published: September 26, 2022 at 6:00 am

Last Updated on October 2, 2023 at 10:39 am

SBI CRISIL IBX Gilt Index – June 2036 is an open-ended Target Maturity Index Fund investing in constituents of the CRISIL IBX Gilt Index – June 2036 Index. We discuss if this new fund offer is suitable for a long-term portfolio.

1 What are Target Maturity Debt Funds? These are open-ended funds investing in various bonds with a specific maturity date. Before a given date, the fund manager will sell all the bonds and hold cash. After the maturity date, the cash will be proportionally distributed to unitholders. To facilitate this process, all target maturity funds issued so far are index funds. That is, they track a bond index.

2 What is the benefit of a target maturity date? The NAV of a debt mutual fund fluctuates daily due to demand vs supply forces in the bond market This is known as duration risk (or colloquially and incorrectly as interest rate risk). The longer the duration of the bond, the higher the fluctuations.

If a bond fund manager buys and holds 5-year bonds, the NAV fluctuations will be highest in the first year of holding. It will be lower in the subsequent years. So if the target maturity date is 5Y, the fund manager will buy bonds maturing a month or so before the fund maturity date. This will result in NAV growth with progressively decreasing volatility.

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Shown below is the average maturity of Bharat Bond ETF. The average maturity progressively reduces.

Average Maturity of BHARAT Bond ETF - April 2031
Average Maturity of BHARAT Bond ETF – April 2031

The modified duration of the ETF is shown below. This is a measure of supply-demand sensitivity. Higher the value, the higher the NAV volatility. It tends to decrease with time but not smoothly as it depends on market price movements.

Modified Duration of BHARAT Bond ETF - April 2031
Modified Duration of BHARAT Bond ETF – April 2031

3 Do these funds carry credit risk? Yes. So far, all target maturity debt funds have restricted themselves to PSU bonds, gilts and state development loans. The chances of credit default are low, but the credit rating can vary, affecting the NAV.

4 What return can I expect from these funds if I invest at the NFO stage? A debt fund investor’s worst mistake is expecting a fixed return! The returns from these funds will depend on two primary factors: (1) Any sudden deviation in demand vs supply in the market (like it happened during the March 2020 market crash) will result in a deviation from the expected yield and actual yield; This is highly probable over the tenure of SBI CRISIL IBX Gilt Index – June 2036 Fund. (2) If the credit rating of a bond changes then such a bond can be replaced by another. (3) Coupon payouts are reinvested are current market rates of the bonds and not at face value. So this guarantees the final return will be different from any expected return at the NFO stage.

The yield to maturity of the Bharat Bond ETF is shown below. Notice the fluctuations due to market volatility. The final yield may or may not be close to the initial expectation. Therefore investors shouldn’t fixate on a return value.

Yield to maturity of BHARAT Bond ETF - April 2031
Yield to maturity of BHARAT Bond ETF – April 2031

Other aspects of such funds can be found here: FAQ: Target Maturity Debt Mutual Funds.

Key features of SBI CRISIL IBX Gilt Index – June 2036 Fund

  • SBI CRISIL IBX Gilt Index – June 2036 Fund has a tenure of about 13.75 years. It matures on 30th June 2036.
  • Only fixed-coupon bearing plain vanilla G-Sec will be eligible for the CRISIL IBX June 2036 index.
  • The index will consist of gilt issuers with a total outstanding greater than Rs.
    5,000 crores
  • The portfolio will be reviewed each quarter. New bonds can be added to the portfolio or can replace existing bonds.
  • The tentative portfolio, according to the scheme document, is:
    • 7.40% GOVT.STOCK 2035 17.23%
    • 6.67% GS 2035 62.99%
    • 8.33% GOVT.STOCK 2036 15.61%
    • 7.54% New GS 2036 4.18%

Thus the portfolio is quite concentrated, with bonds maturing 13 years away. Therefore investors must expect the NAV to be highly volatile for the first 6-7 years. Such volatility will ensure that the final return does not match the anticipated return.

Can I invest in SBI CRISIL IBX Gilt Index – June 2036 Fund for a long-term goal?

The key advantages of this fund are: (1) It’s NAV volatility decreases with time, and (2) there is no active fund management risk, particularly concerning duration calls (managing interest rate risk).

If you need money after 13-15Y, SBI CRISIL IBX Gilt Index – June 2036 Fund can be considered provided:

  • You do not fixate on expected returns. The final return is well and truly unknown. Many investors say they are ready for this but expect a return close to the initial yield to maturity. This is a mistake. The maturity date only helps limit the risk, not fix the return.
  • You can handle severe NAV volatility and years of poor returns.
  • You invest as per an asset allocation and understand how to reduce risk in a goal-based manner systematically.
  • These are easier said than done!
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