With the interest prices on fixed deposits (FDs) falling under the price of inflation, investors are losing the acquiring energy of the funds invested. Many of such investors are now prepared to venture out of the apparent security of FDs and want to invest in other economic instruments that provide larger returns along with security and liquidity.
Apart from the bonds supplied by the government and corporate, funds accessible in the debt mutual fund (MF) category are viewed as as a viable option to FDs.
Earlier, liquid funds had been the most favourite decision amongst the fixed-return investors due to superb liquidity and fantastic security records.
However, with the Reserve Bank of India (RBI) maintaining the crucial policy prices pretty low and banks and other economic institutions flush with funds, the prices of returns on liquid funds have fallen drastically, producing them out of favour for retail investors.
The newly rejuvenated overnight fund category also failed to attract the retail investors due to ultra low price of return.
Hit by a series of bond defaults, investors have also lost faith in a lot of other categories of debt funds.
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So, maintaining the security and liquidity challenges on record, following funds could be viewed as by FD investors as viable options.
Fixed Maturity Plan (FMP)
As FMPs invest in economic instruments with fixed maturity periods and fixed coupon prices, like FDs, investors could predict – with a fair quantity of accuracy – how substantially maturity worth they would get and when they will get it.
Disadvantages: The major disadvantage of FMPs are that they are close ended funds and therefore, transactions like obtain/extra obtain, redemption can not be made with the concerned AMCs.
Although such funds are registered in exchanges, transactions are tricky due to lack of participation.
Roll Down Strategy
Funds based on roll down tactic are open ended funds and provide fantastic liquidity.
However, as AMCs continue to do fresh investments and liquidate the old ones as per their investment objectives, investors can not predict the maturity worth and investment duration of the underlying securities.
The simple entry and exit choices also have an effect on the valuation of funds.
Target Maturity Gilt Index Fund
The returns on Target Maturity Gilt Index Funds are usually predictable to a fair extent as the investments are completed predominantly in government securities and the underlying securities mature inside the targeted maturity period.
So, the danger is lesser due to the predictability on exactly where investments are completed when the instruments would mature.
Apart from the minimum credit danger and minimum duration danger, Target Maturity Gilt Index Funds offer you liquidity as properly as they are open ended and transactions with the concerned AMCs are permitted prematurely.
Risks
Investments in MFs are capital investments and therefore are viewed as riskier than investments in FDs.
Target Maturity Gilt Index Funds face reinvestment danger as at the time of reinvestment following 6-7 years, coupon price on new securities following maturity of current securities could be reduced.
Investors could also face volatility on withdrawal ahead of the target maturity date. This could occur if new securities are issued by the government at an interest price beyond a threshold limit.