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Target Maturity Funds see surge in assets as investor traffic multiplies

As bond yields rise, investors can use target maturity funds to lock in their investments at higher yields

June 14, 2022 / 02:22 PM IST
 Target Maturity Funds have grown significantly over the last few years after Government-led Bharat Bond ETFs were launched by Edelweiss Mutual Fund. Apart from ETFs, now there are also several index target maturity funds. While target maturity funds have a fixed maturity date, which is when the scheme and its portfolio investments mature, investors can easily make pre-mature withdrawal as these are open-end funds. However, it is advisable to stick till the maturity of the fund, to get returns closer to the fund's yield to maturity. As interest rates rise, investors can use such funds to lock-in their investments at higher yields.
Target Maturity Funds have grown significantly over the last few years after the government launched Bharat Bond ETF (managed by Edelweiss Mutual Fund) back in December 2019, which became the country's first target maturity fund. Apart from ETFs, now there are also several index target maturity funds. While target maturity funds have a fixed maturity date, which is when the scheme and its portfolio investments mature, investors can make early withdrawals as these are open-end funds. However, it is advisable to stick till the maturity of the fund, to get returns closer to the fund's yield to maturity. As interest rates rise, investors can use such funds to lock-in their investments at higher yields.
Investor flows have shifted towards passively-managed target maturity funds from active funds. Industry executives say that actively-managed funds have found it challenging to deliver inflation-adjusted returns in recent times, and post-Franklin Templeton crisis, there have been concerns on the credit quality of the portfolios.
There has been a preference for passively-managed target maturity funds among investors in recent months. Industry sources say that post-Franklin Templeton crisis, there have been concerns on the credit quality of the portfolios of actively-managed funds. On the other hand, the portfolio of passively-managed target maturity funds are well-known as these are linked either index of bonds of state development loans or Government securities or a blended index of the two. Also, there is more return predictability as the fund aims at giving returns closer to the yield to maturity of the index, if the investor holds the fund till its maturity.
Mutual funds have launched more index-based target maturity funds, as all ETFs don't have enough liquidity on the stock exchanges and there can be wider deviations in the executed price and the intraday NAV (INAV) of the ETF.
Mutual funds have launched more index-based target maturity funds, as all ETFs may not be able to generate enough liquidity on the stock exchanges and there can be wider deviations in the executed price and the intraday NAV (iNav) of the ETF. The new SEBI regulations for passive funds are aimed at reviving liquidity for ETFs on the exchanges, as new regulations state that no transaction below Rs 25 Crore can be settled directly with the AMC. All such transactions have to be routed through exchanges. SEBI also wants to develop the market-making ecosystem by incentivising market-makers that provide liquidity for ETFs.
To invest in ETFs, investors require demat accounts. There is no need for investors to have a demat account to invest in an index fund.
To invest in ETFs, investors require demat accounts. There is no need for investors to have a demat account to invest in an index fund.
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Target Maturity Funds with 2026-2027 maturity have seen lot of interest from investors. Financial planners are advising this maturity segment to investors for tax indexation benefit, as well as optimum yields. Both these maturities are currently offering yields of 7.48 percent-7.55 percent, respectively. "Beyond these maturities, like 2028 and 2029 are relatively illiquid segments," said a debt fund manager.
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: Jun 10, 2022 08:26 am
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