Aditya Birla's TMF to merge with its corporate bond fund. What should you do?

Let's understand how this merger will benefit investors of the target maturity fund

Aditya Birla's TMF to merge with its corporate bond fund. What should you do?

Aditya Birla Sun Life Mutual Fund has announced the merger of its target maturity fund (TMF), CRISIL IBX AAA Mar 2024 Index Fund , with its corporate bond fund. The former scheme was launched on February 3, 2023, and is set to mature on March 31, 2024.

Investors of the TMF have been given a choice. They can either take their money out from the fund or opt for its merger with Aditya Birla Sun Life Corporate Bond Fund . In the latter scenario, investors will receive units in the corporate bond fund equivalent to the value of their investment in the TMF.

In this article, we explain the potential benefits of the merger and help investors of the target maturity fund make an informed decision.

About Aditya Birla's corporate bond fund

The fund invests at least 80 per cent of its AUM (assets under management) in short-term corporate bonds with AA+ rating or more. It can invest the remaining 20 per cent in government securities and money market instruments.

By mandate, corporate bond funds (a type of debt fund) must invest at least 80 per cent of their total assets in high-rated bonds of private companies. These funds are suitable for a short investment horizon of two to three years or the fixed-income allocation in your longer-term portfolio. They can offer higher returns than a bank fixed deposit in the long-term horizon. However, they do not guarantee returns or the safety of your capital, unlike a bank deposit.

Aditya Birla Corporate Bond Fund has given decent returns in the last five years compared to its peers. However, the returns have not significantly exceeded inflation.

Aditya Birla Corporate Bond Fund's performance versus its peers

Returns (%) Performance rank in category
2019 9.98 12/18
2020 12.01 4/20
2021 4.55 7/20
2022 3.54 4/21
2023 7.23 3/21
Note: Returns of direct plan (in %); Performance rank as per Value Research categorisation

Besides performance, here are a few other factors to consider.

Benefits of higher yields

Experts anticipate a potential decline in interest rates from their current peak, making corporate bond funds more appealing. There is an inverse relationship between interest rates and debt fund returns. This means that as interest rates drop, previously issued bonds with higher interest become more valuable, boosting the returns of debt funds that hold them.

Therefore, if investors opt to go ahead with the merger, they can benefit from the price appreciation and the higher yields of the corporate bond funds.

Tax considerations

If investors choose to withdraw money from the target maturity fund upon maturity, it will subject them to short-term capital gains tax at the applicable income tax slab rate.

However, if investors opt to proceed with the merger, they will not incur any immediate tax obligations. Further, their investments in the corporate bond fund will be considered as made before April 2023. So, they will qualify for the benefit of indexation after the three-year holding period, substantially easing the tax burden.

Our take

The said target maturity fund matures on March 31, 2024. Therefore, for those who don't need funds right away and have a longer investment horizon, the merger presents an attractive opportunity to benefit from higher yields and favourable tax treatment.

Do note that opting for the merger does not require any particular action to be taken. It will be assumed that the investors consent to the proposed change.

Also read: Time to benefit from gilt funds?

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