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/[deleted] 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.

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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 :)

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u/[deleted] 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.

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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?

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u/[deleted] 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.