January’2023

Did you know that Govt. of India currently offers a FD equivalent of 10.3% p.a. pre
taxreturn for 6 years locked in capital for HNIs (who are at 30% tax bracket)

Let us understand, some key features that we have discovered about this offering.

Discovery no 1
Target Maturity Fund – Currently, there are 350 plus open ended funds out of which there are roughly 55 debt funds
which are Target Maturity Funds that follows a roll down strategy. What this strategy means is, the fund manager
invest in some instruments and holds them till maturity without trading in them.

Discovery no 2
Target Maturity Funds which invest 100% in G Sec are available – Out of 55 there are around 16 funds that invest
100% of the portfolio in Central Government paper with a roll down strategy.

SBI CRISIL IBX Gilt Index - Apr 2029 Fund invests 100% in Government securities with an underlying maturing in
April 2029. The fund is currently at a net yield of 7.00%. Roll down strategy brings visibility in return as the actual
returns delivered by the funds if held till maturity would very likely be equal to the net yield on the day of entry.
Let us see the math below:
Date Cash flows Amount
31-12-2022 Purchase -1,00,00,000
30-04-2029 Average Maturity Value@ 7% 1,53,46,146
net yield
30-04-2029 Tax Payable 3,05,014
XIRR (post-Tax) 6.66%
Tax Computation:

Maturity Value 1,53,46,146

Indexation assumed 5.0%
Indexed Cost 1,40,71,004
Taxable Gains 12,75,141
Tax Value 3,05,014
Post Tax Gains 1,50,41,132
Post Tax IRR 6.66%

Let us compare this to a Fixed Deposit offering a 10.3% pre-tax return for ~6 years:
Date Cash flows Amount
31-12-2022 Purchase -1,00,00,000
31-12-2023 Interest Payment (yr.1) 10,30,000
31-12-2023 Tax payment on Interest -3,69,564
31-12-2024 Interest Payment (yr.2) 10,30,000
31-12-2024 Tax payment on Interest -3,69,564
31-12-2025 Interest Payment (yr.3) 10,30,000
31-12-2025 Tax payment on Interest -3,69,564
31-12-2026 Interest Payment (yr.4) 10,30,000
31-12-2026 Tax payment on Interest -3,69,564
31-12-2027 Interest Payment (yr.5) 10,30,000
31-12-2027 Tax payment on Interest -3,69,564
31-12-2028 Interest Payment (yr.6) 10,30,000
31-12-2028 Tax payment on Interest -3,69,564
30-04-2029 Interest Payment (for 4M) 3,43,333
30-04-2029 Tax payment on Interest -1,23,188
30-04-2029 Maturity Value 1,00,00,000
XIRR (Post Tax) 6.61%

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 January’2023

Did you know that Govt. of India currently offers a FD equivalent of 10.3% p.a. pre
taxreturn for 6 years locked in capital for HNIs (who are at 30% tax bracket)

As can be seen above:

1. Investing in the above fun is equivalent to investing in FD at 10.3% pre-tax rate.

2. Unlike banks which take time to pass on the benefit of increased interest rate to investors, this fund
have already transmitted the benefit of higher yields to the investor.
3. Further, the differential tax treatment between Debt Mutual funds vis-à-vis Fixed Deposits enhances the
post- tax return for a debt fund investor.

Conclusion:

Investing in Target Maturity Funds takes away the return volatility if held till maturity, the expected return is
substantially better than that of the Fixed Deposit. Further, the underlying papers are of higher credit quality than
any bank given that these are Government of India bonds. As such, this is by far the most preferred choice of debt
allocation in client portfolio.

As mentioned earlier the expected return would most likely be equal to the entry net yield if held till the maturity
of the funds. This can be explained as below:

Post-Tax Return on Equivalent FD Return

Entry Bond Yield maturity Required Pre-Tax
7.00%* 6.66% 10.3%
6.90% 6.47% 10.1%
6.60% 6.24% 9.7%
6.30% 6.01% 9.4%
6.00% 5.77% 9.0%
*Currently these funds are yielding 7.00%.

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 January’2023

Did you know that Govt. of India currently offers a FD equivalent of 10.3% p.a. pre
taxreturn for 6 years locked in capital for HNIs (who are at 30% tax bracket)

Annexure:

The ideal holding period for the fund is till the target maturity as mentioned above, but an investor can exit the fund
any time he wishes without penalty. The only disadvantage in doing so is he may not realise the entry yield.

Here, we have analysed the return that can be expected if an investor exits the fund after 3 years under various
interest rate scenarios:
Se

Sensitivity of Return Expectation in CAGR Terms for a 3 Year Investor at different Interest Rate Levels

Fund Name -0.50% -0.25% 0.00% 0.25% 0.50% 0.75%

SBI CRISIL IBX Gilt Index - Apr 2029 Fund 7.71% 7.36% 7.00% 6.64% 6.28% 5.92%

Even if there is a 75 bps interest rate hike and an investor exits after 3 years, he can realise a pre-tax return of ~6.0%

Disclaimer:
This report has been issued by AR Wealth Ltd, a subsidiary of Anand Rathi Financial Services Limited (ARFSL). The information
herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any
opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other
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