With the SBI Mutual Fund recently launching three target maturity funds (TMF), there is a brighter spotlight on this relatively less-talked about category of debt funds.
Notably, the SBI is not the only fund house that is currently on the launch runway for such passive debt funds. SEBI data showed that between June and August this year, 56 filings for new fund offers (NFOs) were submitted. Out of them, 22 were for TMFs. There has also been a spike in the amount of funds mobilised by long-term, government-backed debt funds. Currently, the passive debt ETF and index fund market has about Rs 80,000 crore in AUM. Just last month, per AMFI data, banking and PSU funds raised Rs 516 crore.
TMFs, too, constitute passive management and investment in less risky securities at core. They basically track a benchmark index of bonds that have a pre-determined maturity date. Investors can enter and exit this scheme anytime, given that they are open-ended. These funds mostly invest in high-grade, AAA rated and almost risk-free debt instruments like PSU bonds, government securities and more.
As Sanjeev Dawar, a Pune-based financial advisor, puts it, TMFs have a solid portfolio of state development loans (SDUs) and bonds that promise consistency of returns. This means that on maturity, investors can expect a stable payback, unaffected by the ongoing interest fluctuations in the market.
This is particularly important in these times, when interest rates globally are undergoing tumultuous times. Consider this. Mostly driven by inflationary pressures that are gripping US hard and touching 8.5%, the Fed recently hiked its interest rates by 0.75 bps.
In fact, its chairman Jerome Powell signalled towards more fiscal pain ahead, with projections stating these rates jumping to 4.40% by the end of 2022 and breaching the 4.60% mark by next year.
Closer home, India’s RBI is also expected to raise rates by 50 bps in the times to come. With inflation accelerating to 7%, spilling out of the apex bank’s comfortable range of 2-6%, the move comes as no surprise. Naturally, investing in TMFs at current levels, when yields are rising, can also spell financial advantage for the portfolio.
Hence, TMFs ensure you reap the benefits of current yields for a long time and also protection from these uncertain times. As per Shifali Satsangee, founder of Funds Vedaa, an Agra-based personal finance advisory, “The predictability of returns, better insulation in terms of interest rate risks, lower credit risks relative to other debt funds and better risk adjusted returns make TMFs an extremely compelling investment instrument in these times.”
It is important for investors to not just have a solid fixed-income component in their portfolio, but also invest in avenues with that provide inflation-adjusted returns. While most debt funds do not offer these returns, TMFs have an edge over them in this regard.
“TMFs also have an edge over traditional instruments due to tax efficiency. If held for 36 months, the rate of taxation is 20% after indexation compared to marginal rate of tax for other debt instruments,” adds Dawar.
Again, since investments are mostly in government-backed securities, the level of credit risk, i.e. borrowers defaulting on their repayments is very slim.
Debt schemes in India, on an average, accrue 7.6% interest to its investors, after all interest and principal repayments. This is assuming that the investor holds the asset out for the entire period till their maturity, which is around 22 years. After considering indexation, investors can end up with a post-tax return of 6.5% in the long-run, along with the flexibility of exiting the fund anytime.
However, as Satasangee puts it, “TMFs particularly suits those retail investors who look for low degree of credit risk, like senior citizens. It is good for millennials who do not want to take high risks, and want to invest for goals which are aligned to maturity of these funds,” she says.