Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2026 Review

Published: March 10, 2021 at 9:25 am

Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2026 is an open-ended target maturity Index Fund predominantly investing in the constituents of Nifty PSU Bond Plus SDL Apr 2026 50:50 Index. The fund has a maturity date of April 30th 2026, after which the assets will be distributed to unitholders. This article explains the features and risks of this fund and discusses when it makes sense to invest in this fund.

The Nifty PSU Bond Plus SDL 50:50 Index appears to be a custom-made index by the NSE for Edelweiss. The index portfolio will consist of 50% public sector undertakings (PSUs) and 50% State Development Loans (SDLs) – the fund will hold 95-100% of this index and the rest in cash to handle daily transactions.

Key features of Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2026

  1. All the bonds in the portfolio will mature before April 30th 2026, and the fund will not sell any of the bonds unless they have to – too many or too large a redemption. Inflows can also cause a deviation from the index.
  2. The risk of default in these holdings is low. However, if the credit rating of the PSU bonds falls from AAA, the NAV will fall. The bond will be replaced during the next rebalance with another AAA bond. However, the fund’s return will deviate from indicative yield at the NFO stage (applicable to point 1).
  3. The initial yield to maturity of the index is 6.3%. The fund’s maturity will depend on points 1 and 2. This will constantly vary depending on changes in the index portfolio and the funds in and outflows.
  4. The initial modified duration of the fund is 4.04 years. The modified duration is a measure of how much the price of a bond and, therefore, the NAV of a debt mutual fund will change if interest rates change by 1%. For this index, the modified duration will gradually decrease as the fund heads towards maturity.
  5. The NAV of  Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2026 will be quite volatile in the first few years.
    • The modified duration of Quantum Liquid Fund is 0.12 years and fluctuations in NAV over the last three years as measured by the standard deviation is 0.44%.
    • The current modified duration of ICICI Prudential Bond Fund is 4.23 years (this, as of now, holds only SOV and AAA bonds). Its standard deviation over the last three years is 3.14% – that is about seven times more volatile than a liquid fund. Even if you wish to buy and hold until maturity, it is important to appreciate the magnitude of this expected volatility.
    • As a target maturity index fund, the modified duration of Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2026 will keep reducing with each year, and so will the volatility.

Who should invest in this fund?

I wish to invest in this fund but will redeem it before the maturity date, say three years. What return will I get? No one knows. It is pot luck. The interest rate risk (as measured by the modified duration) will be quite high in this fund (relative to a liquid fund), and the NAV will be quite volatile. Even losses are, in principle, possible. We recommend that you not invest in this fund if you need the money before the maturity date.

I wish to invest a lump sum in this fund and will hold until maturity? Is it safe? What return will I get? Holding until maturity is significantly safer than redeeming mid-way or investing in an open-ended fund with a modified duration of about four years. This is because the interest risk is significantly reduced if the bonds are held until maturity (some bonds may be sold midway to handle redemptions).  The risk of default is quite less.

So if you wish to invest a lump sum for five years, the risk is reasonable and relatively lower than any open-ended debt fund. You can expect a return of about 5.5% before tax. The risk will be higher than a fixed deposit, say in SBI, but that is the price you will have to pay if you desire lower tax outgo.

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    I wish to start a SIP in Edelweiss Nifty PSU Bond Plus SDL Index Fund until April 2026. Is it safe? What return can I expect? The safety issues for a SIP are similar to that of a lump sum, as mentioned above. The return is harder to estimate as the NAV will fluctuate significantly due to market forces. The first few instalments will be invested in a medium duration bond fund, while the last few instalments will be invested in a short-term –> ultra short-term –> liquid fund. This is because the average portfolio maturity period is continuously falling.

    In summary, Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2026 has some welcome features:

    • Passive investment (albeit in an index with no history available! The factsheet released only today by NSE, 10th March, still has the confidential stamp! Although the AMC had this info on their promotional page).
    • Target maturity date, which reduces interest risk if the investor holds on.
    • A portfolio with a good credit rating.
    • There is only one catch: the maturity date is just five years away.

    During this period, no great amount of wealth can be made by investing in this fund compared to an SBI/ICICI/HDFC bank FD or RD.  Yes, this fund, in all likelihood, should be able to fetch better post-tax returns (as per current FD rates). Still, the benefit would be at best marginal and not worth it for an investor unfamiliar with NAV movements, in particular, senior citizens.

    This idea’s main USP is a combination of open-endedness and closed-endedness (maturity date) and not passive nature or low TER. The maturity date significantly reduces the interest rate risk on the final redemption, and the open-endedness allows an investor to buy and sell at will. These features are suited for a long-term goal where a portfolio can be systematically or tactically rebalanced. However, when the duration is just five years, these benefits are largely minuscule.

    Investors who appreciate bond market risks and have short/medium-term needs five years or more away can invest in this fund instead of a bank FD. Others, particularly senior citizens, are better off ignoring this NFO.

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