The investments in target maturity funds (TMFs) launched by Aditya Birla Sun Life AMC Limited surpassed ₹20,000 crores in April 2023. This also underlines investors’ growing interest in these funds. Many reasons can be attributed to such a high AUM amount such as the focus on fixed returns, disillusion with the performance of equities and more.
Commenting on the growth of passive funds, A Balasubramanian, Managing Director and Chief Executive Officer, Aditya Birla Sun Life AMC said, “We are happy to announce that our passive funds have achieved a significant milestone by crossing ₹25,000 crores of assets under management along with target maturity funds crossing ₹20,000 crores. This accomplishment reflects the growing popularity of passive investing in India, as well as the trust our investors have placed in us. While we remain committed to providing top-quality active investment opportunities to our investors, we are equally excited about the passive investment space.”
Amidst a temporary pause in rate hikes and the expectation of a higher repo rate in the future, does it make sense to invest in TMFs or shift your focus on these investments? A tête-à-tête with personal financial analysts reveals the importance of funds like these in one’s investment portfolio.
Prathiba Girish, Founder, Finwise Personal Finance Solutions shares, “Irrespective of taxation one needs to have debt allocation in one's portfolio. The TMFs attracted investors’ attention for two reasons, the first reason being better taxation for a holding period of more than three years. The second reason is the possibility of MTM gains due to interest rate reversal in the future. While the tax advantage is no longer available, having a product with the downside capped and possibly of upside is a good deal. Further tax is payable on redemption and not in the interim like in the case of fixed deposits. Hence, long-maturity TMFs is still an attractive option. However, if one chooses to put money in TMFs, one will have to deal with reinvestment risk.”
Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners said, “Target Maturity Funds invest in government gilt funds, State Development Loans (SDLs) and PSU AAA-rated bonds mostly. Hence, the quality of the portfolio is very good. The tax advantage is gone now, however. Still, this is a great option for those who want to take the least risk, get decent returns and do not want regular income. It is fine to invest in them now as we are somewhere near the top of the interest rate cycle.”
CA Kanan Bahl, a financial educator and growth consultant, says, “Even though no one can say this with certainty, but the interest rate up-cycle, at least in India, seems to have ended. Despite strong inflation, the RBI did not decide to hike the rates in its latest policy meeting. Thus, debt funds might seem to be getting more attractive. However, please note the changes in debt funds taxation applicable with effect from April 01, 2023, introduced vide Finance Bill, 2023. Also, do consult a financial advisor before taking any decision.”
Basavaraj Tonagatti, a Certified Financial Planner, SEBI Registered Investment Adviser and a Finance Blogger at BasuNivesh said, “Investments in TMFs are best suited for those who know exactly when they need the money. If your goal time horizon matches the maturity of the goal, I strongly still suggest you go ahead with TMFs. The three simple reasons for it are as below.
- You are avoiding the credit risk and default risk. As the current TMFs invest in Gilt, SDL or PSU bonds.
- You do not need to shift your debt portfolio from long-term bond funds to short-term bond funds as the goal is nearer. As maturity is known, the interest rate risk volatility by default will reduce.
- Low cost and simple to understand.
Considering all these aspects, I strongly still suggest TMFs.”
Despite the government doing away with the indexation benefit in debt fund investments, many investors are showing interest in allocating their earnings to these passive debt mutual fund schemes. The reasons for investing in these mutual funds having defined maturity dates can be many though many people prefer it to lower chances of default coupled with the fixated returns on these instruments.