- Date : 05/03/2023
- Read: 4 mins
Edelweiss has launched a passive-short-duration index-fund, the first of its kind in India. It does away with the drawbacks of debt mutual funds. With the fixed deposits reaching record heights since RBI started increasing repo rates since May 2022, can this new fund provide a better return than FDs and become a viable alternative to bank FDs? Let's find out.
Alternative to FD: Can Short Duration Index Funds Perform better than FDs?
Edelweiss Asset Management has launched a short-duration index fund, an open-ended fund. It is the first of its kind passive-short-duration index-fund in India. This is a passive-makeover of debt mutual funds. The name of the fund is Edelweiss CRISIL-IBX 50 50 Gilt-Plus-SDL Short-Duration Index-Fund. The new passive debt mutual fund will invest in a wide range of SDL (State Development Loan) and Indian government bonds by replicating "CRISIL IBX 50 50 Gilt-Plus-SDL Short-Duration Index." Can it become an alternative to FDs? Let’s find out.
Repo Rate Rise and Increase in FD Rates
In recent months, the Reserve Bank of India has raised repo rates by 2.5% or 250 basis points since May 2022. It is the rate at which the apex bank of India lends money to banks if there is a shortfall of funds.
As inflation hovered within 6-7% almost throughout 2022, RBI started increasing this key rate to contain inflation. In response, many banks have increased their fixed deposit rates. This has made fixed deposits lucrative, attracting many investors to invest in FDs.
Also Read: Repo Rate Hiked - RBI may Increase Key Rates Further!
Many leading commercial banks have increased their FD rates by more than 1.5% in just 12 months.
- In the case of SBI, the annual interest rate for fixed deposits (having 2-3 years tenure) has increased from 5.1% to 6.75% during January-December 2022.
- Punjab National Bank is offering an 8.1% annual interest rate on fixed deposits for senior citizens. That is way above the current inflation rate in India. The inflation rate was 5.72% in December 2022.
Low Return on Debt Mutual Funds
Do debt funds or debt mutual funds provide a better return than FDs? Let’s check the performance of debt funds.
- There’s nothing to rave about the performance of actively managed debt funds. For the last ten years, 77% of the time, short-term bond mutual funds have underperformed the benchmark over three years. These actively managed funds are supposed to:
- Add value by switching between longer and shorter securities,
- Taking advantage of changes in rates of interest, and
- Add value
- According to Edelweiss’s Head of “Product, Marketing, and Digital,” Niranjan Avasthi, most debt funds fail to manage these funds to add value actively. The most glaring problem is their wrong duration calls. During reversals of interest rates, this exposes those debt funds to wrong duration calls.
- There are many debt funds that:
- Show strongly during softening interest rates.
- But their gains get nullified when- rates start increasing.
- High expenses of debt funds eat into the total returns.
- The average charge of short-duration debt funds is 1%.
- In some cases, the charge goes as high as 1.5%.
Also Read: Repo Rates v/s Debt Funds: What Should Investors do as Repo Rates Rise?
Passive Makeover of Debt Mutual Funds: Can it be Alternative to FDs?
Open-ended short-duration index funds can provide you with a better return than FDs. Edelweiss’s “CRISIL-IBX 50:50 Gilt-Plus SDL Short-Duration Index-Fund” is a low-cost savings instrument that enables you to invest your money for a span of 1-to-3 years. How is it different from debt funds? It replicates the underlying index’s constituents.
This index fund invests:
- 50% in government bonds
- 50% in SDLs
In each of the above two segments, most liquid securities come under 4 duration buckets:
- 1-2 years
- 2-3 years
- 3-4 years
- 4-5 years
Another important feature of this fund is the passive management of duration. You’ll get a certain level of consistency in it because the fund's duration can't deviate over 10% from the underlying index. Moreover, the fund expense is capped at just 0.65% for the regular plan.
All these factors enable this passive makeover of debt mutual funds to become a viable alternative to FDs.
Alternative to FD: Can Short Duration Index Funds Perform better than FDs?
Edelweiss Asset Management has launched a short-duration index fund, an open-ended fund. It is the first of its kind passive-short-duration index-fund in India. This is a passive-makeover of debt mutual funds. The name of the fund is Edelweiss CRISIL-IBX 50 50 Gilt-Plus-SDL Short-Duration Index-Fund. The new passive debt mutual fund will invest in a wide range of SDL (State Development Loan) and Indian government bonds by replicating "CRISIL IBX 50 50 Gilt-Plus-SDL Short-Duration Index." Can it become an alternative to FDs? Let’s find out.
Repo Rate Rise and Increase in FD Rates
In recent months, the Reserve Bank of India has raised repo rates by 2.5% or 250 basis points since May 2022. It is the rate at which the apex bank of India lends money to banks if there is a shortfall of funds.
As inflation hovered within 6-7% almost throughout 2022, RBI started increasing this key rate to contain inflation. In response, many banks have increased their fixed deposit rates. This has made fixed deposits lucrative, attracting many investors to invest in FDs.
Also Read: Repo Rate Hiked - RBI may Increase Key Rates Further!
Many leading commercial banks have increased their FD rates by more than 1.5% in just 12 months.
- In the case of SBI, the annual interest rate for fixed deposits (having 2-3 years tenure) has increased from 5.1% to 6.75% during January-December 2022.
- Punjab National Bank is offering an 8.1% annual interest rate on fixed deposits for senior citizens. That is way above the current inflation rate in India. The inflation rate was 5.72% in December 2022.
Low Return on Debt Mutual Funds
Do debt funds or debt mutual funds provide a better return than FDs? Let’s check the performance of debt funds.
- There’s nothing to rave about the performance of actively managed debt funds. For the last ten years, 77% of the time, short-term bond mutual funds have underperformed the benchmark over three years. These actively managed funds are supposed to:
- Add value by switching between longer and shorter securities,
- Taking advantage of changes in rates of interest, and
- Add value
- According to Edelweiss’s Head of “Product, Marketing, and Digital,” Niranjan Avasthi, most debt funds fail to manage these funds to add value actively. The most glaring problem is their wrong duration calls. During reversals of interest rates, this exposes those debt funds to wrong duration calls.
- There are many debt funds that:
- Show strongly during softening interest rates.
- But their gains get nullified when- rates start increasing.
- High expenses of debt funds eat into the total returns.
- The average charge of short-duration debt funds is 1%.
- In some cases, the charge goes as high as 1.5%.
Also Read: Repo Rates v/s Debt Funds: What Should Investors do as Repo Rates Rise?
Passive Makeover of Debt Mutual Funds: Can it be Alternative to FDs?
Open-ended short-duration index funds can provide you with a better return than FDs. Edelweiss’s “CRISIL-IBX 50:50 Gilt-Plus SDL Short-Duration Index-Fund” is a low-cost savings instrument that enables you to invest your money for a span of 1-to-3 years. How is it different from debt funds? It replicates the underlying index’s constituents.
This index fund invests:
- 50% in government bonds
- 50% in SDLs
In each of the above two segments, most liquid securities come under 4 duration buckets:
- 1-2 years
- 2-3 years
- 3-4 years
- 4-5 years
Another important feature of this fund is the passive management of duration. You’ll get a certain level of consistency in it because the fund's duration can't deviate over 10% from the underlying index. Moreover, the fund expense is capped at just 0.65% for the regular plan.
All these factors enable this passive makeover of debt mutual funds to become a viable alternative to FDs.
