Investors prefer target maturity funds to FMPS
Lower interest rate risk and predictable returns key attractions
Target maturity index funds — passive investment vehicles for debt investments — have emerged as an alternative to fixed maturity plans (FMPS), close-ended debt mutual fund schemes hugely popular until a few years ago. The relatively lower interest rate risk, coupled with stable and predictable returns, has been attracting investors.
In recent weeks, fund houses, including ICICI Prudential MF, Aditya Birla Sun Life MF, and Edelweiss MF, have launched such target maturity funds.
Like other passive funds, target maturity index funds replicate the composition of the underlying index and have specific maturity dates aligned to the expiry date of underlying bonds. For example, Edelweiss Nifty PSU Bond Plus SDL Index Fund-2027 will mature on April 30, 2027, and will distribute maturity proceeds to the investors after the maturity date.
“Somewhere down the line we may see rates going up and this is the best category of funds to escape market-related volatility. One of the biggest advantages of such funds is that there is no markto-market volatility if investors hold until maturity,” explains Joydeep Sen, corporate trainer-debt.
These funds invest in various debt instruments issued by state development loans (SDLS), public sector undertakings (PSUS), and government securities. Target maturity funds can either be index funds or exchange-traded funds (ETFS).
Industry players say target maturity index funds are similar to FMPS but they are not close-ended in nature and investors can buy and sell their units at any time. Even though FMPS are listed on the exchanges, there is hardly any liquidity which makes it difficult to exit.
“Now, in index funds, investors need not worry about liquidity as they buy and sell from fund houses. Even in ETFS, there is liquidity so that investors don’t face any problems. More and more people are moving from FMPS to target maturity funds and assets of FMPS are dwindling,” said Sen.
The data from the Association of Mutual Funds in India (Amfi) shows that assets under management (AUM) of FMPS have fallen sharply from ~1.4 trillion in March 2020 to ~53,286 crore in August 2021.
Another major advantage of target maturity debt funds is that they invest in top-rated securities and there is almost no credit risk in such schemes.
“The passive debt product combines the simplicity of traditional savings instruments with the predictability of returns, quality portfolio of state government bonds and Aaa-rated PSU bonds, target maturity period and the flexibility of an open-ended scheme, better liquidity, and tax benefits,” says A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC.
Industry players say that just as equity ETFS, bond ETFS are also poised to take off in a big way, thanks to products like target maturity debt funds. “Going ahead, we will see more fund houses line up products in this space,” a senior executive said.