RIGHT ON TARGET

TARGET MATURITY FUNDS ARE A GOOD OPTION FOR PREDICTABLE RETURNS BUT IT'S IMPORTANT TO LOOK AT THE INDEX COMPOSITION AND CREDIT RATINGS OF ENTITIES WHOSE SECURITIES ARE INCLUDED IN THE BENCHMARK

- BY ANAGH PAL

THINK DEBT FUNDS are boring? Well, in the case of target maturity funds (TMFs), boring is good. TMFs are passive investment products that take the guesswork out of interest rates as their maturity date is aligned with that of the bonds in their portfolio. “This ‘roll-down’ strategy means short-term mark-to-market fluctuations from rate changes are gradually neutralised as the bonds converge to par at maturity,” says Sirshendu Basu, Head-Products, Bandhan AMC.

Unlike traditional debt funds, which are actively managed and so exposed to duration risk based on interest rate movements, TMFs offer predictability of returns if held till maturity. Duration risk, also called interest rate risk, is movement in the value of the bond in response to changes in interest rates (a rise in rates reduces bond prices and vice versa). The icing on the cake is a lower expense ratio considering these funds are managed passively. Investors get the expected amount if the company or the government that has issued the bond doesn’t default.

"However, TMFs lose their edge when investors exit early if rate hikes happen just before maturity, or when markets rally, because unlike active funds, they don't capture big mark-to-market gains," says Manish Kothari, CEO and Co-Founder, ZFunds, a platform for investing in mutual funds. The key question is: How can an investor make the best use of TMFs?

CREDIT CHECK