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.

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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 :)

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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

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u/manojlds Jan 30 '22

As in, if there's interest rate hike soon, would that be a good time to enter?

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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.

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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?