The current volatility in the stock market has caused many investors to look for stable investment options. One cannot put one’s entire savings in fixed deposits (FDs) irrespective of how banks are raising FD rates in response to repo rate hikes. There is a limit to which you can park your earnings in public provident fund (PPF) accounts. Many have moved to invest in National Savings Certificates (NSCs), traditional post office savings products, that allow them to earn 6.8 per cent interest every year while also lending them tax benefits up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961.
Investors are now actively pursuing these investment options owing to their stability compared to some of the best equity funds that are also posting negative returns over the past six months. Despite the extent and quantum of safety associated with them, there is a constant risk of loss of principal or interest owing to sudden, unforeseen changes in the interest rates. Though this kind and level of risk is too unlikely in the near future, unwilling investors are now moving on to target maturity funds (TMFs) that provide benefits similar to debt funds within a predetermined date.
Not many people are aware of TMFs that investors can put their money into just like they do in debt funds, the difference being that investors can align their financial goals in sync with the maturity dates of these funds. Besides, these are not active funds like most equity funds that deliver good returns but may suffer from fund manager biases. These funds are passively managed as they track the movement and returns of an underlying bond index. A look at the portfolio of these funds reveals how these contain bonds that mature within the period surrounding the fund’s stated maturity.
Investors also benefit from the compounding effect in these bonds as the interest earned from various bonds in these TMFs during the holding period gets reinvested in these funds to earn good returns. The average return one can earn from investing in these funds is around 6.50 per cent over five years. Though one may argue against the not-so-high returns from these funds, investors may prefer them to diversify their investments. Putting money in a mix of such schemes involving fixed income instruments maturity between 2026 and 2028 can help them earn good returns in addition to ensuring stability in the face of sudden macroeconomic factors affecting stock market performance.
Niranjan Awasthi, head product at Edelweiss Mutual Fund says, “Investors would get the best risk-adjusted returns for target maturity schemes that mature in 2026-2027.”
Also, unlike most other fixed maturity plans that are close-ended in nature, thus, allowing limited investments, the open-ended nature of TMFs offers enhanced scope of liquidity. If held till maturity, TMFs can assure you returns high enough to beat the ongoing inflation rate. This is evident from 10-year TMFs that can earn returns exceeding seven per cent.