Investing In Target-Date Debt Funds

Target-date funds or target-maturity funds are like index funds or exchange-traded funds (ETFs) and have been structured in a way that will help you grow assets optimised for a specific timeframe. These funds seek to address investors’ capital requirement at a future date. The report provides further insights

When it comes to debt mutual funds the perception of retail investors is that they are risk-free and safe. This is presumed by most retail investors. However, the back-to-back credit rating downgrades of Infrastructure Leasing and Financial Services (ILFS) in 2018, DHFL and Yes Bank in 2019 has compelled investors to change their perception about the safety of debt funds. This year investors have had to alter their viewpoint about return expectation from debt funds. They cannot expect a predictable return from debt funds even through government securities. The returns of long duration funds or funds having higher exposure to long duration papers are in the negative zone. This time it was not credit risk but interest rate risk. All this has certainly been very demoralising for debt fund investors.

Such cumulative events might have led many retail investors to go back to their bank fixed deposits (FD) where they are assured of getting two major things:

1. Assurance of receiving back the invested capital.

2. Getting predictable fixed returns.

But what if we say that you can achieve your financial goals even with target-date debt funds and that too with better returns than your bank FDs, particularly for people in the highest tax bracket? In this article, our effort would be towards helping you understand what are target-date funds, their performance and risk factors, the kind of tax efficiency they provide to investors and how ideal they are for investments.

Understanding Target-Date Debt Funds