Mirae Asset MF launches Nifty SDL Jun 2027 Index Fund
Premium- Indexation benefit for six years can make the fund’s post-tax returns attractive
With the current financial year drawing to a close, mutual fund AMCs are rushing to launch target maturity funds (TMFs). The USP of these funds is their return predictability and the benefit of a flat 20% tax (with indexation benefit) on capital gains realised on sale of units after being held for over 3 years.
Indexation benefit significantly lowers the tax liability on the returns (capital gains) from a debt fund such as a TMF. This puts them at an advantage over say, fixed deposits, where the interest income gets taxed at an individual’s income tax slab rate.
Among the latest TMF launches is Mirae Asset Mutual Fund’s Nifty SDL Jun 2027 Index Fund, a fund that will passively follow the Nifty SDL Jun 2027 Index. The new fund offer (NFO) will be open from March 25 to March 29, 2022. SDLs or state government bonds are backed by sovereign guarantee and can be considered among the safest debt papers from a credit quality perspective.
Indexation benefit
To calculate the capital gain from the sale of debt mutual fund units, you have to deduct the initial investment value from the final sale value. With indexation benefit, you get to adjust your initial investment value for inflation before arriving at your capital gain. This adjustment has to be done using the IT department’s Cost Inflation Index for each financial year. So, longer the gap between the purchase and the sale year, the larger the number of years for which indexation can be applied, thereby lowering your capital gains for taxation purposes.
So, for instance, if you invest in a TMF by March 31, 2022 and redeem your investment only on April 1, 2027 or later, then you can get the benefit of indexation for 6 years (from FY22 to FY28).
Investor returns
The Nifty SDL Jun 2027 Index which the Mirae Asset MF’s latest TMF will be targeting is offering a yield to maturity (YTM)of 6.67%. If you invest in the fund and remain invested until maturity, your indicative return will approximately equal this YTM minus the expense ratio. In addition, you can take advantage of indexation benefit for 6 years to lower your tax liability on your fund returns. According to an illustration from the NFO presentation, assuming a pre-tax return of 6.53% and indexation benefit for 6 years at 5% inflation rate, the post-tax return would come to 6.43%. That is, Rs. 1 lakh invested in the scheme today will become Rs. 1.37 lakhs (post-tax) by maturity in June 2027.
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