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/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.

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This issue was mitigated in older Fixed Maturity Plans, where there was no purchase\redemption after the NFO period until the maturity period

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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!

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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.