List of Debt Index Funds in India 2023

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Sharing with a complete list of Debt Index Funds in India 2023 and target maturity funds (or passive debt funds) available in India with AUM and expense ratio. Index investing or passive investing in equity is gaining a lot of popularity in India. However, now the slow shift toward passive or Index Debt Funds.

List of Debt Index Funds in India 2023

Many of us are equity investors and can easily understand equity products. However, when it comes to debt mutual funds, we scare a lot as it is hard for the common man to understand these various categories of debt funds. Especially post-Franklin Mutual Fund fiasco, many were scared a lot to park their money in debt funds. For such investors, the solution is simple, low-cost Debt Index Funds and Target Maturity Debt Funds.

Currently, in India, we have two types of passive debt index funds.

# Open-ended index funds.

The majority of these are ETFs. However, recently Edelweiss Mutual Fund launched a unique open-ended passive index fund. I wrote about the same in “Edelweiss CRISIL IBX 50:50 Gilt Plus SDL Short Duration Index Fund – Time to move to Passive Debt Funds?“. The rest of them are ETFs. Hence, if you are looking for open-ended debt funds, then the choices are limited as of now (excluding the above shared Edelweiss Mutual Fund).

# Target Maturity Funds

These are open-ended passive debt funds that track an underlying bond index that mature at a certain date. The bonds in the portfolio are held to maturity and all interest payments received during the holding period are reinvested in the fund. Once the underlying portfolio of bonds matures, then the same will be distributed among the investors as per their holding portion.

They are currently mandated to invest in government securities, PSU bonds, and SDLs (State Development Loans). Hence, they carry lower default risk compared to other debt funds. Since these funds are open-ended, investors can choose to withdraw his/her investment in case they need or any adverse development around the bond issuers like the likelihood of a default or a credit downgrade (which is low as these TMFs investing in Gilt Bonds, PSU Bonds, and SDLs). 

Even though liquidity is provided, it is always better to hold them till maturity. Hence, if TMF offering to mature in 2032, then make sure that you don’t need the money for up to 2032.

The NAV of the fund will fluctuate on daily basis as per the demand and supply of the bond market. This is usually called interest rate risk. Usually, if the interest rate started to go up (take for example due to inflation), then the price of the bond will fall. Hence, the price movement of the bond is inversely proportional to the interest rate movement. This volatility is higher for long-term maturing bonds than short-term maturing bonds.

Assume that the fund is holding 10-year maturing government bonds. The fluctuation will be high during the first years and as the maturity of the underlying bonds is nearer, the volatility will slowly get reduced.

The biggest misconception is about the return expectation from these funds. As they showcase the YTM (Yield To Maturity), many think that this is going to be their fixed return on investment. However, it is not like that.

YTM indicative return shows you that if you invested in that particular fund and hold it till maturity, then you can expect that much of returns. However, if you are selling in middle, then the returns will be different than the YTM showed at the time of investment. Because the returns will be based on that day’s interest rate movement and price.

Now let us assume that someone is trying to invest on monthly basis, then the return on investment in such funds will not be like the initial YTM. Because as I mentioned above, the price of the underlying bond will fluctuate on daily basis, each month’s investment will have a different YTM (even if you hold it till maturity).

Hence, never go by the current YTM if you are selling before maturity or if you are investing on monthly basis.

Advantages of Target Maturity Funds

# Simple to Understand – As they hold mainly government securities, PSU bonds, and SDLs (State Development Loans), and the number of bonds is also limited, they are simple to understand than the other categories of debt funds available in the market.

# Low Cost – The cost of these funds is too low compared to actively managed debt funds. The majority of them are within 0.2%. Hence, upfront you can save a lot.

# Volatility reduces – Let us compare the normal Gilt Constant Maturity Fund with these categories of funds. In the case of Gilt Constant Maturity Funds, the volatility is always the same as the fund manager has the mandate to hold around 80% of the fund portfolio in 10-year maturity gilt. However, in target maturity funds, as they hold with target maturity, as the period of maturity is nearer, the interest rate risk volatility will slowly get reduced. You no need to change move to low volatility funds nearer to your goals. By default, the volatility will get reduced.

# Credit Risk – As these funds invest only in government securities, PSU bonds, and SDLs (State Development Loans), they are safer than other debt funds (where they explore corporate bonds also). However, you can’t run away from interest rate risk and volatility (the longer the maturity higher the volatility).

# Liquidity – Except ETF, the rest of all funds are liquid in nature. Hence, you no need to bother about liquidity issues.

# Tax Advantage – As these funds are treated like debt funds for taxation, if you are falling under the highest tax bracket and holding for more than 3 years, then such funds are more tax efficient than the other instruments like Bank FDs or RDs. However, these funds do not enjoy any special treatment and they are taxed as per debt fund taxation.

Disadvantages of Target Maturity Funds

# Return Expectation – Many mistakenly assume that the current YTM of these funds will be the same throughout the maturity period of the fund. However, it is not the case. As the price of the bond fluctuates on daily basis, YTM also changes on daily basis. Hence, if you are investing a lump sum, then the YTM showing on that particular day is an indicative return for you (if you hold it till maturity). However, if you are investing as a monthly investment, then you can’t expect the starting YTM as if your return on investment. YTM for each of your SIP will change and accordingly it is either more or high based on the interest rate movement during your investment journey.

# Volatility – In the case of traditional Bank FDs, you may not face any volatility. However, in the case of TMFs, as the price is volatile on daily basis and such volatility is more for long-term maturity funds, you must be capable of digesting some form of volatility. Hence, in terms of volatility, don’t compare these as alternatives to your Bank FDs.

# Tax Burden – Assume that your goal is 10 years away and you are unable to find the right TMF, then obviously you have to go for less than 10 years maturing TMF, then you have to bear taxation twice on your investment. Once when TMF matures and again at the 10th year when you reinvest the maturity proceeds of TMF and withdraw. Hence, unnecessary tax burden.

List of Debt Index Funds in India 2023

I am sharing with you both open-ended and target maturity debt index funds list through Google Sheet.

Wherever the current AUM is blank and expense ratio is blank means they are the newly launched funds. Hence, the data is currently not available. Also, wherever the expense ratio is mentioned as zero means the expense ratio is almost like zero.

Conclusion – These products are simple, low-cost, and easy to understand. By investing in such products, you are completely removing the risk of default or downgrade risk. However, as you can’t avoid interest rate risk, you have to choose the funds cautiously. Just because these funds invest in government or PSU bonds does not mean that they are free from the interest rate volatility.

Note – Refer the complete list of equity index funds which also includes the ETFs available in India at “List of Index Funds and ETFs in India 2023“.

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5 Responses

  1. Dear Basavaraj Sir, Wishing you , your family & your team members a Happy & prosperous Ugadi .

    I have investment of Rs.7 Lakhs in SBI Banking & PSU debt fund Since Jul 2020 which has underperformed. On completion of 3 years in Jul 2023 ( to avail benefit of indexation of holding of 3+ years ) I wish to withdraw & invest in other Debt mutual fund(s).

    My Dilemma arises around the uncertainty of future interest rate movement , thereby unable to plan which should I consider for investment – Short term or Medium Term or Long term or Corporate bond fund or Gilt funds ? I can hold the investment for next 3-5 years tenure

    Your inputs will be invaluable in making informed decision.

    Thanks & best regards

    1. Dear Chandrashekhar,
      If your holding period is around 3-5 years, then better to use Money Market or Ultra Short Term Debt Funds. Otherwise, if you are sure of when you need the money, then can use TMFs listed above.

  2. Hi Basu Sri,

    > Once when TMF matures and again at the 10th year when you reinvest the maturity proceeds of TMF and withdraw. Hence, unnecessary tax burden.

    My apologies, but this point is not clear to me.

    1. Dear Siddharth,
      Assume that you need money after the 12th year. If you invest in 10 years maturing TMF, then when it matures, you have to pay the tax on the gain. Again when you re-invest in certain debt funds, then on the 12th year again on the gain from the 11th to 12th-year taxation. That’s what I said.

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