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Mutual Fund houses launch target maturity funds for FY-end indexation benefits. Should you invest?

Some years ago, many fund houses used to launch fixed maturity plans (FMPs). These days barring a few FMPs, many fund houses are starting target maturity funds (TMF).

March 28, 2022 / 12:24 PM IST
 (Representative Image)

(Representative Image)

Many small investors scramble to complete their tax-saving investments before the deadline of March 31. There are smart investors, too, hunting for tax-efficient opportunities at this time of the year. Mutual funds aware of the trend launch fixed-income schemes targeting investors looking for tax-efficient returns.

Fund houses such as Aditya Birla Sun Life, HSBC, Mirae and Tata have launched bond schemes to tap this opportunity. Investors have to consider many factors before making an investment decision.

How do the schemes work?

For the uninitiated, capital gains booked on sale of units of a bond fund held for more than three years are considered long-term gains. Such gains are taxed at a rate of 20 percent post-indexation. Compared with a long-term fixed deposit offering an assured rate of interest that gets taxed as per the slab rate, debt funds offer more tax-efficient returns.

The deal is bettered by initiating the investments towards the end of the financial year. If you invest now (before March 31, 2022), you buy units of the bond fund in FY2021-22. If you hold on to the units until, say, April 2027, then you are eligible for indexation benefit for six years (FY2023-2024-2025-2026-2027-2028).


Although you are enjoying indexation benefits for six years, practically you are invested for five years and a few days -–just because you get the buying and selling dates right.

This way, you are cutting down your tax liability on gains earned on a bond fund.

Why these NFOs?

A few years ago, many fund houses used to launch fixed maturity plans(FMPs) at this time of the year. Nowadays, barring a few FMPs, many are launching target maturity funds (TMFs).

These schemes come with a defined maturity date and invest in bonds that are maturing in line with the scheme’s maturity date. For example, Aditya Birla Sun Life Nifty G Sec June 2027 ETF invests in the constituents of the Nifty G Sec June 2027 index. The index comprises five most liquid government securities maturing during the 12-month period ending June 30, 2027.

Mirae Asset Nifty SDL Jun 2027 Index Fund tracks Nifty SDL Jun 2027 Index, which comprises 20 State Development Loans (SDLs) maturing during the 12-month period ending June 15, 2027.

Most fund houses are launching these schemes with a focus on good quality bonds maturing in five to six years from now. If the investor holds the units in these schemes until maturity, then she can expect a predictable return. Many of these indices are quoting a yield (expected return) of around 6 to 6.5 percent.


Are they attractive?

In the last couple of years, we have seen surplus liquidity in the system. The Reserve Bank of India cut interest rates and ensured abundant liquidity in the financial system as the economy was fighting the slowdown caused by COVID-19.

Short-term rates are quoting in the range of 3.5 percent and 4 percent. Mahendra Kumar Jajoo, CIO-fixed income, Mirae Asset Investment Managers (India), says that investing in medium-term bonds at the moment works better than waiting for a year for interest rates to rise and then making your move.

“Medium term rates on sovereign bonds are attractive. They offer better risk-adjusted returns for investors with a matching investment timeframe,” he says.

What are the risks?

The bond funds face two important risks: duration of the portfolio and credit quality. Since most of the target maturity funds are invested in high-quality bonds (sovereign debt and AAA-rated public sector undertakings), there is little credit risk.

Duration risk, however, is prominent as most of these schemes are investing in bonds that will mature over the next five to six years. If the speed and the extent of increase in interest rates is significant, the net asset values of these schemes may come under pressure. Rising bond yields push down bond prices, which means mark-to-market losses for investors.

Most experts are of the opinion that RBI may not be too aggressive in raising interest rates. “RBI has been supportive of growth so far and inflation numbers are not too high in India, if we compare them with historical inflation in India,” says Joydeep Sen, corporate trainer- debt.

He expects RBI to raise policy rates by 50 to 75 basis points in the next one year. One basis point is one-hundredth of a percentage point.

Liquidity is another parameter that you should not ignore. “Since the target maturity funds invest in high- quality bonds and offer liquidity if required prior to maturity, they are a better investment avenue than conventional fixed-maturity plans,” says Sen.

Should you invest?

Although better tax- efficient returns on a good credit-quality fixed income portfolio with predictable returns is a winning formula for most conservative investors, do not rush in. Your investment timeframe should match that of the scheme. Although TMFs offer liquidity, a rapid paced upward movement in yields can bring mark-to-market losses, which can be avoided by staying put until maturity.

The expense ratio of the new schemes is not known. This impacts your final return. Generally, most TMFs charge a low expense ratio compared to their actively managed bond fund counterparts. However, investors should not ignore this factor.

Savvy investors can also consider investments in existing TMFs to enjoy similar benefits if the residual maturity of these products is in excess of three years and their timeframe matches that of a scheme’s maturity.

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Nikhil Walavalkar
first published: Mar 28, 2022 08:01 am
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