A thread to understand this new category of debt funds - Target Maturity Index Funds.
How it is different from other debt funds, what are the benefits and risks one need to know while investing in such funds.
RT and share if you find it useful.
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How it is different from other debt funds, what are the benefits and risks one need to know while investing in such funds.
RT and share if you find it useful.
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What is meant by Target Maturity debt fund?
As the name goes, target maturity debt fund has a specific maturity date on which it matures.
A fund having target maturity as 30th April 2026 will end on that day and proceeds will be given back to the investor.
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As the name goes, target maturity debt fund has a specific maturity date on which it matures.
A fund having target maturity as 30th April 2026 will end on that day and proceeds will be given back to the investor.
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These funds invest in bonds that have maturity in line with the maturity of the fund.
A Target Maturity Fund of April 2026 will invest in bonds that will mature on or before April 2026.
The fund hold these bonds till their maturity.
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A Target Maturity Fund of April 2026 will invest in bonds that will mature on or before April 2026.
The fund hold these bonds till their maturity.
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This means the fund starting today with target maturity of April 2026 will invest in bonds maturing in next 5 years and gradually will see it's average maturity reducing as time passes.
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After 1 year, this fund will have average maturity of 4 yrs, after 2 yrs it will further get reduced to 3 years and after 4 years will be merely 1 yr.
This concept is also known as roll-down strategy, as maturity of the fund is gradually coming down.
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This concept is also known as roll-down strategy, as maturity of the fund is gradually coming down.
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A Target maturity INDEX fund is one which replicate the index which has similar maturity.
A Target maturity fund of April 2026 will follow an index with maturity of April 2026.
Index constituents becomes the universe for this fund and ensures transparency.
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A Target maturity fund of April 2026 will follow an index with maturity of April 2026.
Index constituents becomes the universe for this fund and ensures transparency.
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What are the benefits of Target Maturity Index Fund?
1. Predictive returns.
These funds have a bond like structure. Where you invest at a particular yield and then if you hold this bond till maturity then returns are exactly same.
A bond with 5 yr maturity at 7% yield.
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1. Predictive returns.
These funds have a bond like structure. Where you invest at a particular yield and then if you hold this bond till maturity then returns are exactly same.
A bond with 5 yr maturity at 7% yield.
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Will give 7% return if you stay invested till maturity.
Similarly, if you invest in a target maturity fund with 5 yr maturity having 7% portfolio YTM, then after 5 years your returns will be broadly in that range.
Returns won't be exact 7%, but closer to it.
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Similarly, if you invest in a target maturity fund with 5 yr maturity having 7% portfolio YTM, then after 5 years your returns will be broadly in that range.
Returns won't be exact 7%, but closer to it.
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The difference could be due to expense ratio and small changes in portfolio, if any.
2. Low interest rate risk
Bond price fluctuate due to changes in interest rates. And hence, in a normal debt mutual fund your returns are dependent on interest rate movements.
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2. Low interest rate risk
Bond price fluctuate due to changes in interest rates. And hence, in a normal debt mutual fund your returns are dependent on interest rate movements.
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Have you noticed that in last 1 month, returns in debt funds have been lower, particularly funds with higher modified duration.
This is due to rise in bond yields.
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Before you read futher, do read this thread to learn more about duration risk.
This is due to rise in bond yields.
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Before you read futher, do read this thread to learn more about duration risk.
https://twitter.com/avasthiniranjan/status/1365980928036642816?s=19
This risk depends on the m.duration of the fund, higher the m. duration, higher is the fluctuation in returns due to changes in interest rates.
In most debt funds, m. duration remains constant and hence, the risk also remains constant. Even if you stay invested for long.
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In most debt funds, m. duration remains constant and hence, the risk also remains constant. Even if you stay invested for long.
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In target maturity fund, the m. duration of the fund reduces gradually as maturity comes closer.
In a 2026 TM Fund, if the m. Duration of the fund in 1st year is around 4 yrs, then gradually it will come down to less than 1 yr in last year and finally 0 on maturity.
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In a 2026 TM Fund, if the m. Duration of the fund in 1st year is around 4 yrs, then gradually it will come down to less than 1 yr in last year and finally 0 on maturity.
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This reduces the risk that can come through due to changing interest rates as you stay invested and approach maturity of the fund.
Even if interest rate rise or fall by 1..2%, your returns won't change much if you stay invested till maturity. It will be closer to YTM.
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Even if interest rate rise or fall by 1..2%, your returns won't change much if you stay invested till maturity. It will be closer to YTM.
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How do you use these funds in your portfolio?
These funds solve many problems.
- They are ideal choice if you are looking to invest for specific period. You just have to choose a fund which matches your time period.
- If you want to invest tactically.
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These funds solve many problems.
- They are ideal choice if you are looking to invest for specific period. You just have to choose a fund which matches your time period.
- If you want to invest tactically.
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You can choose longer target maturity fund to benefit from rising bond prices when interest rates fall.
- You want to ladder up your investments in different maturity buckets to match your cash flow needs in different years.
These funds are open for entry and exit anytime
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- You want to ladder up your investments in different maturity buckets to match your cash flow needs in different years.
These funds are open for entry and exit anytime
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What are the risks?
If the target maturity is longer, then these funds are equally volatile in the initial years. Volatility reduces only when they start approaching their maturity year.
Hence, it is very important to match your investment horizon with maturity of fund.
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If the target maturity is longer, then these funds are equally volatile in the initial years. Volatility reduces only when they start approaching their maturity year.
Hence, it is very important to match your investment horizon with maturity of fund.
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Today if you want to invest for 5 years, then invest in a target maturity fund with 2026 maturity.
If you're Investing for 10 yrs, only then choose 2031 target maturity.
This is key to take maximum benefit out of these funds.
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If you're Investing for 10 yrs, only then choose 2031 target maturity.
This is key to take maximum benefit out of these funds.
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Given this space has got open after the launch of BHARAT Bond ETFs (first target maturity scheme), these funds are fast becoming popular because of their multiple benefits.
Make right use of these funds to build a good debt portfolio.
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Make right use of these funds to build a good debt portfolio.
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@EdelweissMF has launched this latest Target Maturity Fund.
Get more details here.. edelweissmf.com/edelweiss-nift…
Get more details here.. edelweissmf.com/edelweiss-nift…
The difference in returns can also occur due to coupons paid in the bond's being re-invested at different rates.
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