MUTUAL FUNDS: Target maturity funds a good bet now

financialexpress.com:

As interest rates are likely to be range-bound or declining, individuals can look at target maturity funds and lock-in at higher yields. Most of these funds at present have a yield-to-maturity (YTM) of 7.3% to 7.5%, which could be a good option for those looking for steady growth on their fixed income investment.

Target maturity funds invest in government securities, bonds of public sector companies and state development loans and hold them till maturity. Investing in a roll-own strategy gives the predictability of returns and the volatility tends to reduce as the fund gets closer to the target maturity. If a fund house buys bonds of three years it will not trade on those bonds and investors will get returns close to what the bond has to offer minus the expense ratio.

Low default risk

The default risk is lower as compared with other debt funds and the duration of the fund keeps falling with time. As these funds have an average maturity ranging from one to 10 years, those looking for a longer term can also consider investing in them. So, if investors want higher predictability of returns and have a longer time horizon, they would be better off with target maturity funds compared to actively managed short-term bond funds. Moreover, these funds use a glide path to change the asset mix to constantly reduce the risk of reaching a target date.

Feroze Azeez, deputy CEO, Anand Rathi Wealth, says considering the predicted range-bound or declining interest rates, investing in target maturity funds appears favourable. “Interest rate is expected to decline next year and this expectation arises from the inclusion of Indian bonds in the JP Morgan Emerging Market Global Bond Index. As a result, the government’s borrowing costs may