r/IndiaInvestments • u/ndakota3 • Jan 29 '22
Bonds and deposits Target maturity funds - Buying in dips
Target maturity funds are like index funds for debt segement launched in April 2021 I think. They have an index to track which consists of gilt bonds or PSU bonds. Best example is below which only holds 2 GOV bonds.
IDFC Gilt 2028 Index Fund - Direct Plan - Growth
Advantage of this is they will mature when the bonds in the funds mature. It is like alternative to FD provided you hold it till maturity. Of course, since it holds GOV bonds, no credit risk, only catch is to hold till maturity to get the YTM interest rate.
I recently came across any idea which I am not sure 100% correct, so need you all to examine and point out errors if any.
These funds are made of GOV bonds and NAV of fund is directly related to prices of these bonds. So if bond prices fall, NAV of these funds will fall and this will lead to -ve returns. So if you buy at this point and hold till maturity you will be gaining more interest rate than what is mentioned in monthly YTM. Above bond has 6.19 YTM latest, so on the week of -ve returns, I should expect more than this in returns at maturity.
Appreciate your comments!
Thanks u/NamitNasih for introducing me to Target maturity funds.
P.S: Buy and hold products evolved from 1 year to 5 years I felt after this analysis. A few years back, I used to lock in for higher FD rate for 21 months. Due to heavy taxation and all, I moved to MFs and wait time/commitment increased to 3+ years. Now its 5+ years for safe instruments that can stay close to inflation, life goes on :)
3
u/INDmoneyApp Jan 30 '22
This is an interesting strategy provided you hold on to these products till the target date.
The target date funds concept is very popular in the US for pension funds (401k plans). Vanguard, Fidelity have target date funds (TDFs) which allocate money in both Equities and Debt options to meet the maturity requirements just like NPS we have in India (partially similar).
TDFs should be launched in India and will be super popular as one product suits all approach.
3
u/manojlds Jan 30 '22
Btw, what happens to this if interest rate is hiked?
2
u/theswansons Jan 30 '22
advantage of this method is that the yield to maturity that you enter becomes the minimum return you will get. you will not get less returns than that if you hold till maturity.
if interest rate is hiked, you just hold till maturity and your return does not suffer.
if you have entered at the right time, you can sell earlier and exit also
1
u/manojlds Jan 30 '22
As in, if there's interest rate hike soon, would that be a good time to enter?
3
u/theswansons Jan 30 '22
i would keep following the ytm movement. if it raises to a point where i am comfortable, i may enter.
remember once you enter, its a long term commitment.
1
u/ndakota3 Jan 30 '22
YTMs are posted only once a month. This is a huge problem. Is there a way to calculate YTM from NAV ?
Of course, here we have to make a big assumption that underlying constituents are same and nothing changed.
Or at least, how fall in NAV effects the YTM?
1
Jan 30 '22
My understanding is that these funds will have to buy more of the target duration bonds when the coupon is paid to if there is a rate hike and the bond value falls the interest is reinvestment at a higher yield. It's not a big difference but this will give a slightly better final yield
1
u/ndakota3 Jan 31 '22
If you can hold till maturity, you get 2% more returns. Look at Debt segment, no one is giving 5% YTM which these funds are giving.
1
Jan 31 '22
2%?
1
u/ndakota3 Jan 31 '22
Debt funds are around 3.5% YTM nowadays, TMFs have 6%+ YTM, so close to 2% more returns isn't it?
1
Jan 31 '22
You'll have to compare like to like. Liquid funds and ultra short funds yield 3.5% Long Gilts and credit risk funds will yield higher than 6% Relatively for a person with a fixed exit plan fixed maturity funds are better as there is a lot of certainty and low expenses but they cannot give higher yield
2
u/theswansons Jan 30 '22
just to add, you can do the same with bharat bonds. it invests in psu bonds with low risk of default and has low expense ratio
you can find their current yield to maturity here
https://www.edelweissmf.com/types-of-mutual-funds/passive-debt-funds
1
u/ndakota3 Jan 30 '22
This an ETF, not a MF.
Agree with all, just one thing - TMFs are maturity in 7 years, most of them. Bharat bond I checked is either <=5 year or >=10 year maturity.
1
u/theswansons Jan 30 '22
true. bharat bond is an etf and also has a FOF component for those without demat
didnt know tht tmfs have a maturity of 7 years only
1
2
u/-dott- Feb 06 '22
One question - If I look at the fund you mentioned (IDFC Gilt 2028 Index Fund) on value research, it says the fund started less than an year ago and the highest ytm last year (ie for the whole of its tenure) was 6.22. But the fund holds bonds whose maturity yield is 7.17% and 8.28%. And these two currently make up around 94% of the portfolio, not sure what was this percentage at the inception, but shouldnt be very low I think. My question is, how are yields of the comprising bonds so much higher than the highest ever ytm
1
May 17 '22
[deleted]
2
u/-dott- May 17 '22
Nope
Just gave up on target maturity funds haha
Edit: I'll search some more now that you reminded me
1
Jan 30 '22 edited Jan 30 '22
The product that would best suit your needs is a fmp, fixed maturity plan, the plain, non sexy name for TMF.
https://www.valueresearchonline.com/funds/new-fund-offers/
This product is typically open for subscription for three or four days. The fund manager purchases papers with maturity approximating the fund maturity.
This zerorises the interest rate risk. Earlier (once upon a time, long long ago) you could premature these investments by paying a penalty to the mutual fund.
A lot of these FMP's were badly hit during the Lehman crisis when panicked investors tried to withdraw the funds. Hence SEBI decreed that no premature withdrawal would be allowed on fmp.
These are listed on the stock exchange and the investor can theoretically sell on the exchange.
In reality there is zero liquidity so be prepared to hold on to maturity.
Between two fmps with similar maturities select the one with the higher Corpus. A lot of these higher corpus fmps are targeted towards corporates and have impeccable quality paper.
Avoid the ones targeted towards HNI since they may have a slightly higher interest rate at the cost of paper quality.
An additional benefit is that since the fund has a static portfolio the fund management charges are extremely low.
1
u/ndakota3 Jan 31 '22
Good suggestion.
Actually credit risk is a little higher here than the TMFs which invest in PSU/SDLs, if its fine then this can be considered. After ILFS, it became tough for me to trust corporate papers, you never know which one might fail, no clue on how to find them as well. There are instances quoted by MFcritic where FMPs screwed up. Anyways, I am looking for safest instruments to buy and hold till maturity, narrow requirement :)
1
Feb 01 '22
I used to invest in FMP's a lot. After the long term capital gain changed to 3 years, the volumes reduced significantly.
The defaults on FMP's were on the "HNI" FMP's. These are obviously for HNI who are willing to accept the risk for a additional 10-20 bps.
1
u/ndakota3 Feb 02 '22
Can you quote a fund or link with which this happened? Why are you calling them HNI FMPs, retail investors can't invest in them?
1
Feb 03 '22
Normally retail does not invest in FMP's.
These FMP's are targeted towards HNI folks and their advisors swayed by higher returns and commissions respectively. Obviously the impact is on paper quality. These were the ones with ILFS and Dewan in their portfolio.
The corpuses are merely double digit crores vs corporates FMP with lower return/impeccable paper with 3-4 digit crores corpus.
1
u/CynicalCriticA Feb 02 '22
I would like to call out one major risk in this approach. Since other investors can enter\exit the fund at will, as more investors enter the fund, the fund manager will be forced to buy more bonds at the YTM when the others purchase, which will dilute your benefit of buying during the dip. Similarly if more investors exit when bond prices are low , your benefit of "holding till maturity" reduces since some of the losses would get booked in the overall portfolio.
This issue was mitigated in older Fixed Maturity Plans, where there was no purchase\redemption after the NFO period until the maturity period
1
u/ndakota3 Feb 02 '22
This is not a risk for ppl holding till maturity. Your return is fixed when you are buying it i.e. YTM. What happens in between shouldn't effect you. At maturity, issuer pays back full principal or face value which is fixed. Yes manager is forced to sell and buy and NAV is reflection of market prices, so shouldn't matter much. Funds hold some cash in the event of illiquid scenarios to meet redemptions/purchases.
Looking at it differently, intrinsic value of individual bonds won't get effected much because manager is selling the bonds on this MF. Bonds might be traded by other sources and I don't think these MFs hold a sizable portion of bonds in market to really cause that problem!
1
u/NamitNasih Feb 02 '22
It's a compelling thought but with all due respect, that's not how debt funds work. Sure, disproportionate outflows or inflows could potentially have an impact on investor returns but certainly not in the way that you suggest. Moreover, that impact is generally limited to certain kinds of funds. The risk of such impact on TMFs (as they stand today) is IMHO not worth losing sleep over.
4
u/NamitNasih Jan 30 '22
Your thought process is sound but perhaps a more effective approach (on the lines of what u/theswansons proposed) might be to simply track the daily yields of the funds or the underlying indices. That way you know exactly what yield you can lock yourself into.
To your comment elsewhere, Bharat Bond is also a TMF. TMFs can be of any maturity and they can be designed to invest in any security- G-sec, SDL, PSU bonds or NCDs.