Index investing in equity is gaining a lot of popularity in India. However, now the slow shift toward Debt Index Funds. Hence, thought to list all the available Target Maturity or Debt Index Funds to invest in India in 2022.
Many of us are equity investors and can easily understand equity products. However, when it comes to debt mutual funds, we scare a lot as it is hard for the common man to understand these various categories of debt funds. Especially post-Franklin Mutual Fund fiasco, many scare a lot to park the money in debt funds. For such investors, the solution is simple, low-cost Debt Index Funds or Target Maturity Debt Funds.
What are Target Maturity Funds?
These are open-ended passive debt funds that track an underlying bond index that mature at a certain date. The bonds in the portfolio are held to maturity and all interest payments received during the holding period are reinvested in the fund. Once the underlying portfolio of bonds matures, then the same will be distributed among the investors as per their holding portion.
They are currently mandated to invest in government securities, PSU bonds, and SDLs (State Development Loans). Hence, they carry lower default risk compared to other debt funds. Since these funds are open-ended, investors can choose to withdraw his/her investment in case of they need or any adverse development around the bond issuers like the likelihood of a default or a credit downgrade (which is low as these TMFs investing in Gilt Bonds, PSU Bonds and SDLs).
Even though liquidity is provided, it is always better to hold them till maturity. Hence, if TMF offering to mature in 2032, then make sure that you don’t need the money for up to 2032.
The NAV of the fund will fluctuate on daily basis as per the demand and supply of the bond market. This is usually called interest rate risk. Usually, if the interest rate started to go up (take for example due to inflation), then the price of the bond will fall. Hence, the price movement of the bond is inversely proportional to the interest rate movement. This volatility is higher for long-term maturing bonds than short-term maturing bonds.
Assume that the fund is holding 10-year maturing government bonds. The fluctuation will be high during the first years and as the maturity of the underlying bonds is nearer, the volatility will slowly get reduced.
The biggest misconception is about the return expectation from these funds. As they showcase the YTM (Yield To Maturity), many think that this is going to be their fixed return on investment. However, it is not like that.
YTM indicative return shows you that if you invested in that particular fund and hold it till maturity, then you can expect that much of returns. However, if you are selling in middle, then the returns will be different than the YTM showed at the time of investment. Because the returns will be based on that day’s interest rate movement and price.
Now let us assume that someone is trying to invest on monthly basis, then the return on investment in such funds will not be like the initial YTM. Because as I mentioned above, the price of the underlying bond will fluctuate on daily basis, each month’s investment will have a different YTM (even if you hold it till maturity).
Hence, never go by the current YTM if you are selling before maturity or if you are investing on monthly basis.
Advantages of Target Marutity Funds
# Simple to Understand – As they hold mainly government securities, PSU bonds, and SDLs (State Development Loans) and number of bonds are also limited, they are simple to understand than the other categories of debt funds available in the market.
# Low Cost – Cost of these funds is too low compared to actively managed debt funds. Majority of them are within 0.2%. Hence, upfrontly you can save a lot.
# Volatility reduces – Let us compare the normal Gilt Constant Maturity Fund with these categories of funds. In case of Gilt Constant Maturity Funds, the volatility is always same as the fund manager has a mandate to hold around 80% of the fund portfolio in 10 year maturitying gilt. However, in target maturity funds, as they hold with target maturity, as the period of maturity nearer, the interest rate risk volatility will slowly get reduced. You no need to change move to low volatility funds nearer to your goals. By default the volatility will get reduced.
# Credit Risk – As these funds invest only in government securities, PSU bonds, and SDLs (State Development Loans), they are safer than other debt funds (where they explore corporate bonds also). However, you can’t run away from interest rate risk and volatility (longer the maturity higher the volatility).
# Liquidity – Except ETF, rest of all funds are liquid in nature. Hence, you no need to bother about liquidity issue.
# Tax Advantage – As these funds are treated like debt funds for taxation, if you are falling under highest tax bracket and holding for more than 3 years, then such funds are more tax efficient than the other instruments like Bank FDs or RDs. However, these funds not enjoy any special treatment and they taxed as per debt fund taxation.
Disadvantages of Target Marutity Funds
# Return Expectation – Many mistakenly assume that the current YTM of these funds will be same throughout the maturity period of the fund. However, it is not the case. As the price of the bond fluctuate on daily basis, YTM also changes on daily basis. Hence, if you are investing a lump sum, then the YTM showing on that particular day is an indicative return for you (if you hold it till maturity). However, if you are investing as a monthly investment, then you can’t expect the starting YTM as if your return on investment. YTM for each of your SIP will change and accordingly it is either more or high based on the interest rate movement during your investment journey.
# Volatility – In case of traditional Bank FDs, you may not face any volatility. However, in case of TMFs, as the price is volatile on daily basis and such volatility is more for long term maturity funds, you must be capable of digesting some form of volatility. Hence, in terms of volatility, don’t compare these as an alternatives to your Bank FDs.
# Tax Burden – Assume that your goal is 10 years away and you are unable to find the right TMF, then obviously you have to go for less than 10 years maturing TMF, then you have to bear taxation twice on your investment. Once when TMF mature and another again at 10th year when you reinvest the maturity proceeds of TMF and withdraw. Hence, unnecessary tax burden.
List of Target Maturity or Debt Index Funds To Invest in India in 2022
Now let me share with you the list of Target Maturity or Debt Index Funds to invest in India in 2022. The list is based on the available funds as on 7th October 2022.
Wherever the the current AUM is blank and expense ratio is blank means they are the newly launched funds. Hence, the data is currently not available. Also, wherever the expense ratio is mentioned as zero means the expense ratio is almost like zero.
Conclusion – These products are simple, low cost and easy to understand. However, if you are investing lump sum and holding till maturity, then you can expect the YTM showed at the time of investment. If you are investing on monthly basis, your YTM changes for each of your investment. Hence, for such a situation the initial YTM may be or may not be possible to expect. Because the future monthly YTM depends on the future volatility of interest rate and bond price movements. But as such products volatility reduces as we reach to the nearer to the maturity, ideal for them who does not want to churn portfolio of shifting from long term debt funds to short term debt funds (when the goal is nearer).
Refer the complete list of equity and debt index and ETF Funds list at “List of Index Funds and ETFs in India 2022 (September)“.
20 Responses
thanks for your reply.
Just to make myself clearer,
suppose I invest in a product maturing 10 years from now, its current YTM is 7.5%. . If i invest lumpsum, I can expect(but not guarantee) about 7.5% returns by 10years.
If I have to invest in SIP then my return depends on YTM variation every month at the time of SIP purchase. ( 7.5 today may be 6 next month and 8 the other month) That sip of that month will give that YTM yeild if held till the maturity date.Do you suggest long term sip in one product or Sips for short periods say 1 year ?especially if investment horizon is more than 7 years and the purpose of investment is to build an emergency fund/debt portfolio of long term investment goals
Dear Suresh,
Your understanding about return expectations from such products is correct. However, I am not pointing to SIPs of different maturity. I am pointing check your actual need and when you need the money. The purpose is to build an emergency fund, then always choose the less volatile safe products rather than chasing the yield from the emergency fund also. During your accumulation phase may also face an emergency situation right?
sir,
while I agree that it is the individual capacity and needs which dictates mode of investment, which in your opinion is better- SIP or lumpsum?
can we use this as a sip mode of investment to build emergency fund?
Dear Suresh,
It depends on your cash flow. If you have a monthly cash flow, then use SIP or lump sum. SIP is a way of investment. It can be used for any wealth accumulation whether it is for emergency fund or for your other financial goals.
1. Is there a maturity date for these funds i.e. if you invest lumpsum and are ready to hold till maturity, then what happens on maturity of the underlying instruments. Will the money be automatically redeemed back to the linked bank account like an FD. If not how to know the exact maturity date to redeem the fund.
2. If auto redemption is not there and you don’t take any action on maturity of the underlying fund what happens. Will the fund house reinvest again in a similar debt index fund.
Dear Alok,
1) As I have mentioned above, they will credit back the money once the maturity of the fund.
2) It will be auto-debit.
Would like to know more about ytm of target maturity funds.
Liquidity is not wanted.
Looking at this is only from tax deferment.
Looking at 15 years of holding etc.
Also contact on watsup is better for me. 9821370940
Dear Shankar,
YTM means the yield you will get if you hold the investment product by investing today to till maturity. In the bond market, it will change on daily basis. Regarding your requirement, refer the above post and execute.
Is it a correct assumption that if one invests at say current ytm of 7.5% and holds till maturity the xirr is going to be 7.5% subject to tracking error? or the return of 7.5% will be affected by incoming as well as going investments during the period ending the maturity date?
(the question is only for one time investment only as it is already clear that ytm for sip will vary from date to date)
Dear Arvind,
Your first assumption is correct.
So, against these funds SIP vs Lumpsum make difference as I read “Because the future monthly YTM depends on the future volatility of interest rate and bond price movements.”
Going Lumpsum on NFO or SIP, which would be beneficial?
Dear Rathesh,
Lump sum and SIP depend on your availability of investable amount.
Is it a correct assumption that if one invests at say current ytm of 7.5% and holds till maturity the xirr is going to be 7.5% subject to tracking error? or the return of 7.5% will be affected by incoming as well as going investments during the period ending the maturity date?
Dear Arvind,
As I mentioned above, if you are investing lump sum, then the day’s YTM is applicable for your return (if you are holding till maturity). However, if you are investing on monthly basis (just for example), then each month’s YTM will differ based on the volatility and maturity period.
Is possible to down load only embedded excel file of list of TMF? I tried but could not do it. If you can help.
Dear Dipak,
No. It is a Google Sheet, which I will update on monthly basis. Hence, you can refer the above sheet as and when you need.
Would be more useful if you had mentioned YTM also as well as source of such data and which website can show the updated data as and when required.
Dear RP,
I purposely not added as the current yields are high and they change on daily basis, thought not to include it.
Please add the YTM data clearly stating that it is valid only for the given date and subject to variation on almost daily basis. It will help investors in selecting the fund most suitable for them
Dear Arvind,
People IGNORE the NOTE and think that the YTM mentioned at the time of writing this post as if the YTM applicable of their investment. Hence, to avoid confusion, I stayed away from mentioning YTM.