Should you switch to target maturity debt MFs? | Economic Times

Amid rising bond yields, asset managers are turning to a new avenue to park investor money—target maturity funds. At least three different fund houses—Edelweiss AMC, IDFC AMC and Nippon India AMC—have launched offerings in this space in recent weeks. A few others have lined up their own offerings. Their unique selling point is the ability to lock-in to prevailing yields and offers a predictable return for the fund’s tenure. Should you make the switch?For investors in traditional open-ended debt funds, rising bond yields are eating into the funds’ NAVs. When interest rate or bond yields rise, bond prices fall, leading to erosion in bond values. This hardening in bond yields is expected to continue for a variety of reasons. In this backdrop, debt fund investors have limited hiding places. Many are fleeing to the relative safety of short and low duration funds that park money in bonds of up to 1-3 year maturity. Shorter duration bonds are comparatively less susceptible to the ravages of rising interest rates. However, these are offering very low yields now.Asset managers are now offering the alternative of target maturity debt funds. Unlike pure open-ended funds, these passively managed debt funds come with a defined maturity like a traditional fixed deposit. Upon maturity, the net asset value of these funds will be paid back to unitholders. This is similar to the fixed maturity plan, except that these allow entry and exit at any time, like open-ended funds. The fund manager simply buys instruments that match the tenure of the fund, and holds them until the maturity date. These funds steadily reduce the residual maturity of investments over the holding period. The defined maturity allows for predictability of return if the investor also stays invested till the fund’s maturity. It takes away the interest rate risk of traditional open-ended funds to a large extent. Even if interest rates rise in the interim, investors who remain invested will be unaffected. Essentially, investors entering the funds now will get locked into the prevailing yields of bonds of the relevant maturity. For instance, the current yield to maturity of underlying index of Edelweiss Nifty PSU Bond Plus SDL Index Fund 2026 is around 6.4%. Any investor in the fund is likely to fetch this return minus the expense ratio at the time of maturity.Debt funds have fared poorly of lateAfter erosion in NAV, the one-year return profile of funds have dipped. 81602108Experts contend that these make for good options given the prevailing uncertainty around interest rates. Kaustubh Belapurkar, Director – Fund Research, Morningstar Investment Advisor India, insists, “Doing away with interest rate risk at this critical juncture is a good proposition.” Besides, the current offerings purely target high-quality instruments that offer a degree of safety for investors, keeping credit risk fairly muted. The Edelweiss fund will invest in an index comprising AAA-rated PSU bonds and state development loans. “Yields have risen in the last couple of weeks and this is a good time to invest in a target maturity fund and lockin investments at higher yields. This index fund can give a fair amount of visible and tax-efficient returns, along with higher safety and transparency at a low cost,” asserts Radhika Gupta, CEO, Edelweiss AMC. Nippon’s offering Nippon India ETF Nifty SDL – 2026 will invest the entire portfolio in state development loans. IDFC’s twin offerings—IDFC Gilt 2027 Index Fund and the IDFC Gilt 2028 Index Fund—will purely invest in government securities and treasury bills.Vidya Bala, Head – Research, Primeinvestor.in, points out that the 6-7 year maturity provides the optimal risk-return at this juncture given the steep yields in this bucket. Further, entering these products now—before 31 March— will allow the investor an additional year of indexation benefit. Indexation refers to the adjustment of purchase price at the inflation rate for the duration of holding the investment. This usually helps bring down tax liability and even if you hold the investment for a few days in a financial year, you can reap the indexation benefit for the entire year. Being passively managed, the funds will mimic the composition of the underlying index. The fund manager has no discretion on the portfolio. These also charge much lower expense ratios than actively managed open-ended debt funds.However, if rates inch up further in the coming months, investors locking-in to prevailing yields now will miss out. It would not make sense to deploy one’s entire surplus in these funds. In fact, short-duration funds would be in a better position to redeploy at higher yields if the scenario emerges, says Belapurkar. Investors with a slightly longer time horizon may even consider Edelweiss Bharat Bond Fund series 2030 and 2031. Both are target maturity funds currently yielding upward of 7%. Further, experts reckon investors would be better off opting for index fund variants rather than ETFs. ETFs are bought and sold on the exchange but liquidity can often dry up, causing market price to diverge significantly from NAV. Investors may not be able to exit without selling at a discount. Index fund variants will not face liquidity issues as the investor can sell units at prevailing NAV directly to the fund house.