Conservative investors are increasingly looking at open-ended target maturity funds for predictable returns with liquidity. Industry experts say this has been happening due to low returns from various fixed income products.
Comparatively, the default risk of target maturity funds is lower as compared to other debt funds as they invest in bonds of public sector companies, state development loans, and government securities. Additionally, with time, the duration of these funds also keeps falling as they are less volatile due to interest rate changes.
Target maturity funds help investors plan their investments for a period of 5 years.
Impact of interest rate changes
When investing in bonds, interest rate changes play an important role in the returns that an investor can make on that bond.
Niranjan Avasthi, Head – Product and Marketing, Edelweiss Asset Management explains “Rise in interest rates leads to falling in bond prices and hence, investors in debt mutual funds are often worried when interest rates start rising. Like we are witnessing now. Target Maturity Passive Debt Funds help investors in managing this risk.”
Industry experts say, investors usually look for return predictability when investing in debt mutual funds, and this is what target maturity passive debt funds aim to offer.
“Since it has a fixed maturity date and invests only in bonds that mature in line with the maturity of the fund, there is no interest rate risk for an investor who invests in this fund and stays invested till its maturity,” points out Avasthi.
It is like investing in a bond and holding it till maturity, irrespective of interest rates going up or down. Since you don’t sell this bond in between, the returns on this bond don’t get impacted by changes in interest rates that may happen in the intermittent period.
Experts say target maturity passive debt funds thus offer stable and predictable returns to investors. Avasthi says, “The returns usually can be closer to the YTM at which one has invested in this fund.”
While in the short term the NAV may get impacted due to changes in interest rates, like in a bond, “if one stays invested till maturity then the impact is negated,” Avasthi concludes.