NFOs review | ICICI Prudential Nifty SDL Dec 2028 Index Fund and ICICI Prudential Nifty G-Sec Dec 2030 Index Fund will open for subscription tomorrow. Read on to see if they are worth investing?
ICICI Prudential Mutual Fund (MF) has announced the launch of two target maturity funds - ICICI Prudential Nifty SDL Dec 2028 Index Fund and ICICI Prudential Nifty G-Sec Dec 2030 Index Fund. These new fund offers (NFOs) will open for subscription tomorrow, i.e. October 4, and end on October 11, 2022.
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While ICICI Prudential Nifty SDL Dec 2028 Index Fund will invest in the constituents of the Nifty SDL Dec 2028 index, ICICI Prudential Nifty G-Sec Dec 2030 Index Fund will invest in the constituents of the Nifty G-Sec Dec 2030 Index.
Both the offering aims to provide returns that closely correspond to the total return of the underlying index, subject to tracking errors, the company said in a statement.
So, what are target maturity index funds?
These are open-ended, passively managed funds that replicate the underlying debt index having a specific maturity date. For example, if a fund has the maturity year of 2025, it will invest in securities maturing around the same time.
The constituents of the index are generally hold-till-maturity.
How target maturity debt index funds stack up against tradition investment avenues?
(Source: ICICI Prudential Mutual Fund)
What are the benefits of investing in target maturity funds?
These funds are passively managed and replicate the respective underlying indices.
Low credit risk
These invest in indices consisting of good quality, sovereign instruments such as state development loans (SDLs) and government securities (depending on the respective schemes), mitigating the impact of credit risk on the portfolio.
They endeavour to enable investors to meet their goals in line with a fixed maturity period.
If held for over 36 months, tax is applicable at 20 percent with indexation (excluding applicable surcharge and cess).
Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. With the help of indexation, they can lower their long-term capital gains, which brings down the taxable income.
They are an open-ended scheme that allows one to buy/sell.
Hold to maturity
They have limited impact on interest rate movements since investments are from a hold-to-maturity perspective.
So, are these funds worth investing?
According to Chintan Haria, Head - Product Development and Strategy, ICICI Prudential AMC, investors looking for fixed duration returns within a specific maturity bucket in this rising interest rate scenario can consider investing in target maturity index funds.
"If held for more than three years, investors can get the benefit of indexation which significantly increases the post-tax returns of those in higher tax brackets," Haria said.
Since ICICI Prudential Nifty SDL Dec 2028 Index Fund and ICICI Prudential Nifty G-Sec Dec 2030 Index Fund are target maturity funds, they are ideally suitable for investors who are looking for predictable returns and are willing to invest for a similar horizon as the duration of the fund, experts opine.
It's imperative to note that investing in these target maturity funds does not make sense when the interest rates are trending downwards. Hence, one should choose the funds based on their risk appetite and the interest rate cycle, experts say.
Those in doubt should consult financial advisors about whether the products are suitable for them or not.