SBI Magnum Constant Maturity Fund: A Debt Fund With Low Credit Risk for long term goals!

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SBI Magnum Constant Maturity Fund can be considered for the debt part of the portfolio to be used for long term goals nearly free of credit risk (as per current scheme rules). The fund will invest at least 80% of its portfolio in central and state government bonds with a maturity of about 10 years.

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When to use this fund: Use only for goals 10 years or more away. The fund will be subject to interest rate risk and the NAV can suddenly jump up or down or gradually move for months.

How to use this fund: This has to be part of the debt component of a long term portfolio with regular or tactical rebalancing. That is a switch from equity to debt or vice versa.

Who should use this fund? Only super-mature investors who focus on target corpus, and portfolio volatility rather on returns.

SBI Magnum Constant Maturity Fund A Credit Risk Free Debt Fund For Long Term Goals

Why a constant maturity gilt fund instead of a gilt fund? No doubt a gilt fund can also be used for long term goals but a 10-year constant maturity gilt fund removes one component of active fund manager risk. A normal gilt fund is for all practical purposes a dynamic bond fund where the fund manager tries to vary the duration of the bond portfolio as per interest rate movements.

That is, but more of long term gilts when rates are expected to fall and shorter-term gilts when they are about to rise. If they get this wrong (and they often do), after claiming to actively lower interest rate risk, it will hurt investor expectations.

Since a constant maturity gilt fund has a mandate to keep the average portfolio maturity close to 10 years, it acts as a proxy 10Y index fund. So a person who has bothered to understand risks has one less thing to worry about.

Why SBI Magnum Constant Maturity Fund?  Among the few funds in this category, this has the highest AUM: 370+ Crores only because it was a short-term gilt fund before the SEBI categorization rules. From the following Value Research screenshot, you could literally tell when the fund changed from short-term to long-term gilt. SBI Magnum Constant Maturity Fund NAV MovementThis also serves as a warning of what to expect from this fund. Since the fund is only a year old, there is little point discussing returns.

Where will SBI Magnum Constant Maturity Fund invest?

As per the scheme KIM (Key information memorandum), The remaining (up to 20%) will be invested in repo, triparty repo and cash. A repo transaction or repurchase transaction is one in which someone wanting money offers a government bond (gilt) as collateral. Since there are two parties involved this is also known as a bilateral repo.

In a triparty repo, the clearing corporation of India will act as an intermediary responsible for holding the collateral and ensuring the flow of cash between the lender and borrower. As a “money market instrument” the interest rate for such bonds is quite low. The credit risk is non-zero but relatively small as the duration of the repo agreement is short-term in nature. There can a credit risk event if the borrower does not honour payments.

The scheme can also manage interest rate risk using futures contracts (derivates). In an interest futures contract, there is an agreement to pay the currently agreed upon price for future delivery. If the interest rate increase then bonds currently held will lower in value but the value of the future will increase thus to an extent offsetting the loss.

However, this can be done with different securities (imperfect hedging).  That the bonds held can be different from involved in the futures contract. If they have different maturities, there will be some loss or gain due to demand and supply market forces. Imperfect hedging has a maximum limit of 20% of scheme assets as per SEBI rules. This comes with some credit risk as the delivery is at a future date. For an example of imperfect hedging refer to page 18 of the scheme document.

Taking into account the current debt mutual fund scenario, the current (as of June 2019) the portfolio allocation mandate of SBI Magnum Constant Maturity Fund is reasonably safe in my opinion in terms of credit risk. In any case, this would be a small part of the portfolio (typically 5-10%).

I plan to include this fund in My Handpicked Mutual Funds (PlumbLine). So will you consider this fund?

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  1. Patty Sir, As usual nice write up.. Whenever there is Above Expected Returns from this fund, is it wise to book profit and park in some liquid fund ?.. thanks, Sir

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