Why targeting maturity mutual funds is a good bet now. | Jobs Vox


For years, debt funds have been overlooked by retail investors, thanks to their market-linked nature of returns. Investors have opted for bank FDs and small savings schemes, opting for the security of guaranteed returns. Three years ago, the debt fund landscape changed overnight. The introduction of asset index-based debt funds—in the form of target maturity bond funds—was a game changer. Domestic investors got a taste of TMFs in the 2019 Bharat Bond ETF series. Since then, several TMFs of various flavors have been launched, offering a compelling investment proposition.

The fixed maturity of TMFs allows the investor to predict the return if the investment lasts until the maturity of the fund, when it pays the full value, including profits. The fund manager simply buys instruments that match the fund’s tenure and holds them until maturity. Any additional bond purchases are aligned with the remaining maturity of the fund. Investors are locked into a bond yield with the appropriate maturity, avoiding interest rate risk. Hemant Rustagi, CEO, Wiseinvest Advisors, said, “Like fixed maturity schemes, TMFs help lock in higher yields, but unlike FMPs, these allow the convenience of exit at any time.” The only caveat to forecasting is that TMFs allow for temporary fluctuations that can sway the final output base of the products they deploy. FMPs do not accept this limitation.

Coming in the form of index funds and ETFs, TMFs simply replicate the composition of a selected index. As index constituents are already known, investors know what to expect – portfolios of very high credit quality, investing in government or AAA rated PSU bonds and also government development loans. Default risk is negligible. Unless the index profile has a very low expense ratio, it means better liquidity in the underlying bonds. Now with yields above 7% across various maturities, there is a case for investing in TMFs for time horizons of three years and beyond. Experts insist investors still have a 2-3 month window to catch higher bond yields.

But first, identify the right maturity buckets to invest in. Investors should match their time horizon with the fund’s maturity. For example, if you have financial needs 3 and 5 years from now, divide your capital into two target maturity funds with corresponding time periods. “Invest in a TMF that matures before or a few weeks before your planned expenditure,” says Amol Joshi, founder of Planrupi Investment Services. Once the maturity buckets are identified, select the highest yielding funds within each bucket. Most recommend opting for schemes that combine gilt or PSU bonds with state development loans. Regardless of your choice, it is important to keep it until maturity. It is the only way to bring returns closer to predicted returns. The influx of TMFs combined with the current high yield makes laddering a healthy strategy. This essentially involves creating a periodically maturing portfolio of such bonds. In the year With maturities between 2025 and 2037, investors can now build a ladder with annual steps—so that a portion of the portfolio matures each year. For example, investors can target funds that mature between 2025 and 2029 on a five-step bond ladder that currently spans the 3-7 year maturity range. You can invest half now and scale the rest through TMFs in a few months, advises Dave Ashish, Founder, StableInvester.

How to accumulate different debt funds

The debt fund landscape has changed with the introduction of target maturity bond funds in 2019.


Building a ladder of TMFs provides return visibility

Targeted maturity bond fund flows combined with high yields now make laddering a healthy strategy.



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