Agencies“There is an ETF that you can buy through your broker, if you have a demat account. For those who do not want to go this via a demat account, there is a fund of funds vehicle. It is just a mutual fund that invests in the ETF and if you prefer that format, then you can talk to your mutual fund advisor and reach out to our team if there are any questions,” says Radhika Gupta, MD & CEO, Edelweiss AMC
The AUM of target maturity funds have risen from Rs 29,600 crore in October 2020 to almost Rs 1,21,855 crore in October 2022. The yields on 10 year G-Secs have moved from 5.87% in November 2022 to 7.3% in 2022. These categories are seeing some interest from investors. Is it volatility or an uncertain environment that is drawing investors?
Target maturity funds were launched in December 2019 with Bharat Bond 1, which is the first in the category and today at almost Rs 1.3 lakh crore, it is the largest fixed income category outside of liquid and overnight funds which is incredibly credible because actively managed fixed income funds in this period have seen outflows post IL&FS and some of the events that have followed.
Now, has this happened because of high levels of rates, etc? I do not think so and we are about 53% of the category as Edelweiss Mutual Fund is today by far the market leader. We have seen interest rates at 7.5%, we have seen them at 6.5% and we have seen them at 7.5% again. The trend is structural. Target maturity funds are for HNIs, the best FD replacement you can get. They are liquid. They are tax efficient at 10% taxation effectively because of indexation. We can talk more about that and finally because of the target maturity structure, they offer predictable returns which actively managed mutual funds did not.
So we have predictable returns in a liquid and tax efficient format and year on year, in our own book, both corporates and individual investors have continued to act and I would not be surprised if the asset class is a couple of lakh crores a few years later.
Let us deep dive into the structure of a target maturity fund. What is there in the offer when you talk about target maturity funds?
If I had to simplify this, when you buy a bond as an individual, say NHAI bond, you buy the bond and you hold it till maturity and if you hold it till maturity, you get the yield you were told at the start of the bond, regardless of whether interest rates move up or down, Ukraine happens, whatever happens, all macro things happen, the FD gives you the same experience, predictable return experience; for X many years you get X percent.
A target maturity fund is a mutual fund that is basically a passively managed mutual fund that buys and holds a collection of bonds. The choice of bonds depends on the kind of target maturity fund it is. Each target maturity fund comes with an index that tells you which kind of bonds it holds but the idea is there is a defined maturity and that is called the target maturity. It could be 2023, it could be 2025, it could be 2033 as in the case of the new issue that we are launching or it could be 2037. But you buy and hold bonds till maturity and you do not actively trade those bonds.
The universal bonds of target maturity funds today is either G-Sec which are lending to the government, state development loans and lending to states, which is also of sovereign equivalent because they are guaranteed by RBI or lending to AAA PSUs – the Navratnas, Maharatnas as in the case of Bharat bond. In doing this, the structure combines credit stability because of the kind of quality of borrowers and predictability of returns.
How can an investor see the transparent aspect of this particular instrument?
This is a passively managed instrument which means that the portfolio has to be benchmarked to an index. The index providers are people like CRISIL and others and the indices are published just like Nifty indices and midcap indices. There are a certain set of names, usually 8 to 10 bonds in a particular index and the target maturity fund can only hold that and in that sense, unlike a lot of funds, we have complete transparency as to the rules governing your target maturity fund.
If it is AAA PSU, it can only be a AAA PSU and if the index has that collection of bonds, then you have to mirror that index. So the structure and the regulatory framework brings a lot of transparency which is something that has made people comfortable.
Let us talk about volatility. Will the investor experience interim volatility and hence the interest rate risk that this instrument might have?
Yes, so this target maturity funds work for people who hold on till the targeted maturity. In the middle, one will experience interest rate volatility. If interest rates move up, bond prices do move down, you will see in a way fluctuation and vice versa. I always say do not invest in a target maturity fund like a liquid fund and the good thing today is there are target maturity funds from 2023 all the way till 2037 from people like us.
What you should do is take your goals. If you have a three-year goal, invest in a target maturity fund with the three-year maturity. If you have a 10-year goal, then please go out with a 10-year maturity and if you have a six month goal, then pick something like 2023 can help you mitigate interest rate risk. What you should definitely not do is look at the yield curve and say the long bond has much higher yields than the one-year bond and I will invest in that because that will have more interest rate risk.
So, interest rate risk is there in the interim period but in the holding period, investors do not get that and one of the things that I can tell you from our own experience of managing this is we have seen AUMs being extremely stable through interest rate regimes. NAVs become negative but customers also have it in their mind that since they have invested till 2030, they are not going to take that out.
Now since there is a period till which your money would be locked in, how can one plan such an investment instrument in their portfolio?
Firstly, there is no lock in. The money is liquid; these funds do not even have an exit load. If one redeems prematurely, one may not get that yield but there is no lock-in as these are completely liquid instruments. The best way to do it is globally there is something called laddering.
Laddering means, if I have Rs 100, I define my Rs 100 into goals; Rs 50 I need in five years, Rs 30 I need in 10 years, Rs 20 I need in 15 years and then I align those time horizons of those goals to my target maturity funds. That is the best way to plan your debt allocation using target maturity funds. So you could have a five-year goal that maybe someone’s education, you could have a 10 year goal that maybe some wedding, you could have a 15-year goal that is retirement and you basically define and bucket your money and match it to the target maturity fund.
Let us talk about tax implication, what are the tax benefits that an investor can get?
This has the same structure as debt mutual funds, which is indexation. Now, what does indexation mean? It means if my target maturity fund is yielding say 7% the current rate of inflation you can assume as 5% that first 5% you do not pay tax on. So the balance 2%, 7-5=2% you pay 20% tax which is about 40 bps on 7% and that is less than a 10% rate of taxation. In comparison, if you had invested in an FD that had earned 7%, you would have been paying a marginal rate of tax that is in excess of 30%.
So for the full taxpaying investor or the 20% taxpaying investor, this is far more tax efficient than a deposit. The math turns out to be 2% plus traditional instrument.
Are there target maturity funds for senior citizens?
Yes, in fact, the long dated target maturity funds can be used very effectively for retirement planning. In the Bharat Bond series, the most popular ones are the long dated ones. The 10 years that we launched in 2030-31-32 and now 2033 is opening. We also did a 2037 product that is a 15-year product, given interest rates are high. One can use this opportunity to plan and lock in rates at a pretty attractive level for 15 years and that works well for senior citizens looking for retirement planning.
Looking at the kind of lock-in durations this fund has to offer, the longer the better is how we will explain it. What kind of duration should one pick up?
It is totally dependent on your goals. As a manufacturer, we are out there to build as many maturities and our commitment is to give a full yield curve and then match it to your horizons. Today with elevated interest rates, the five to 10 year point is on the curve of some very exciting opportunities but it is individual and goal specific. The only thing is if you are investing long dated, it is great to lock in that money but remember it is a long dated allocation.
Talking about the fourth series of Bharat Bond ETF that is launching today, give us the details.
Three series are already done. Rs 50,000 crore of Bharat Bond and Bharat Bond 2033 which is a 10-year product opens for subscription today. People keep asking me what has changed, the real answer is nothing has changed. It is the same product AAA PSU target maturity structure is the same – indexation 2033. I think the responses to all our past three launches have been fantastic. So why try to fix something that is not broken?
For all the first-time investors, what is the exact process? How to go about it? Do you just get in touch with the broker and buy this?
There are two variants that always come up. There is an ETF that you can buy through your broker, if you have a demat account. For those who do not want to go this via a demat account, there is a fund of funds vehicle. It is just a mutual fund that invests in the ETF and if you prefer that format, then you can talk to your mutual fund advisor and reach out to our team if there are any questions.
The AUM of target maturity funds have risen from Rs 29,600 crore in October 2020 to almost Rs 1,21,855 crore in October 2022. The yields on 10 year G-Secs have moved from 5.87% in November 2022 to 7.3% in 2022. These categories are seeing some interest from investors. Is it volatility or an uncertain environment that is drawing investors?
Target maturity funds were launched in December 2019 with Bharat Bond 1, which is the first in the category and today at almost Rs 1.3 lakh crore, it is the largest fixed income category outside of liquid and overnight funds which is incredibly credible because actively managed fixed income funds in this period have seen outflows post IL&FS and some of the events that have followed.
Now, has this happened because of high levels of rates, etc? I do not think so and we are about 53% of the category as Edelweiss Mutual Fund is today by far the market leader. We have seen interest rates at 7.5%, we have seen them at 6.5% and we have seen them at 7.5% again. The trend is structural. Target maturity funds are for HNIs, the best FD replacement you can get. They are liquid. They are tax efficient at 10% taxation effectively because of indexation. We can talk more about that and finally because of the target maturity structure, they offer predictable returns which actively managed mutual funds did not.
So we have predictable returns in a liquid and tax efficient format and year on year, in our own book, both corporates and individual investors have continued to act and I would not be surprised if the asset class is a couple of lakh crores a few years later.
So the trend is structural. Of course, debt will be a part of anybody’s asset allocation and higher rates means one can lock-in at better rates but I do not think it is about interest rate sensitivity.
Let us deep dive into the structure of a target maturity fund. What is there in the offer when you talk about target maturity funds?
If I had to simplify this, when you buy a bond as an individual, say NHAI bond, you buy the bond and you hold it till maturity and if you hold it till maturity, you get the yield you were told at the start of the bond, regardless of whether interest rates move up or down, Ukraine happens, whatever happens, all macro things happen, the FD gives you the same experience, predictable return experience; for X many years you get X percent.
A target maturity fund is a mutual fund that is basically a passively managed mutual fund that buys and holds a collection of bonds. The choice of bonds depends on the kind of target maturity fund it is. Each target maturity fund comes with an index that tells you which kind of bonds it holds but the idea is there is a defined maturity and that is called the target maturity. It could be 2023, it could be 2025, it could be 2033 as in the case of the new issue that we are launching or it could be 2037. But you buy and hold bonds till maturity and you do not actively trade those bonds.
The universal bonds of target maturity funds today is either G-Sec which are lending to the government, state development loans and lending to states, which is also of sovereign equivalent because they are guaranteed by RBI or lending to AAA PSUs – the Navratnas, Maharatnas as in the case of Bharat bond. In doing this, the structure combines credit stability because of the kind of quality of borrowers and predictability of returns.
How can an investor see the transparent aspect of this particular instrument?
This is a passively managed instrument which means that the portfolio has to be benchmarked to an index. The index providers are people like CRISIL and others and the indices are published just like Nifty indices and midcap indices. There are a certain set of names, usually 8 to 10 bonds in a particular index and the target maturity fund can only hold that and in that sense, unlike a lot of funds, we have complete transparency as to the rules governing your target maturity fund.
If it is AAA PSU, it can only be a AAA PSU and if the index has that collection of bonds, then you have to mirror that index. So the structure and the regulatory framework brings a lot of transparency which is something that has made people comfortable.
Let us talk about volatility. Will the investor experience interim volatility and hence the interest rate risk that this instrument might have?
Yes, so this target maturity funds work for people who hold on till the targeted maturity. In the middle, one will experience interest rate volatility. If interest rates move up, bond prices do move down, you will see in a way fluctuation and vice versa. I always say do not invest in a target maturity fund like a liquid fund and the good thing today is there are target maturity funds from 2023 all the way till 2037 from people like us.
What you should do is take your goals. If you have a three-year goal, invest in a target maturity fund with the three-year maturity. If you have a 10-year goal, then please go out with a 10-year maturity and if you have a six month goal, then pick something like 2023 can help you mitigate interest rate risk. What you should definitely not do is look at the yield curve and say the long bond has much higher yields than the one-year bond and I will invest in that because that will have more interest rate risk.
So, interest rate risk is there in the interim period but in the holding period, investors do not get that and one of the things that I can tell you from our own experience of managing this is we have seen AUMs being extremely stable through interest rate regimes. NAVs become negative but customers also have it in their mind that since they have invested till 2030, they are not going to take that out.
Now since there is a period till which your money would be locked in, how can one plan such an investment instrument in their portfolio?
Firstly, there is no lock in. The money is liquid; these funds do not even have an exit load. If one redeems prematurely, one may not get that yield but there is no lock-in as these are completely liquid instruments. The best way to do it is globally there is something called laddering.
Laddering means, if I have Rs 100, I define my Rs 100 into goals; Rs 50 I need in five years, Rs 30 I need in 10 years, Rs 20 I need in 15 years and then I align those time horizons of those goals to my target maturity funds. That is the best way to plan your debt allocation using target maturity funds. So you could have a five-year goal that maybe someone’s education, you could have a 10 year goal that maybe some wedding, you could have a 15-year goal that is retirement and you basically define and bucket your money and match it to the target maturity fund.
Let us talk about tax implication, what are the tax benefits that an investor can get?
This has the same structure as debt mutual funds, which is indexation. Now, what does indexation mean? It means if my target maturity fund is yielding say 7% the current rate of inflation you can assume as 5% that first 5% you do not pay tax on. So the balance 2%, 7-5=2% you pay 20% tax which is about 40 bps on 7% and that is less than a 10% rate of taxation. In comparison, if you had invested in an FD that had earned 7%, you would have been paying a marginal rate of tax that is in excess of 30%.
So for the full taxpaying investor or the 20% taxpaying investor, this is far more tax efficient than a deposit. The math turns out to be 2% plus traditional instrument.
Are there target maturity funds for senior citizens?
Yes, in fact, the long dated target maturity funds can be used very effectively for retirement planning. In the Bharat Bond series, the most popular ones are the long dated ones. The 10 years that we launched in 2030-31-32 and now 2033 is opening. We also did a 2037 product that is a 15-year product, given interest rates are high. One can use this opportunity to plan and lock in rates at a pretty attractive level for 15 years and that works well for senior citizens looking for retirement planning.
Looking at the kind of lock-in durations this fund has to offer, the longer the better is how we will explain it. What kind of duration should one pick up?
It is totally dependent on your goals. As a manufacturer, we are out there to build as many maturities and our commitment is to give a full yield curve and then match it to your horizons. Today with elevated interest rates, the five to 10 year point is on the curve of some very exciting opportunities but it is individual and goal specific. The only thing is if you are investing long dated, it is great to lock in that money but remember it is a long dated allocation.
Talking about the fourth series of Bharat Bond ETF that is launching today, give us the details.
Three series are already done. Rs 50,000 crore of Bharat Bond and Bharat Bond 2033 which is a 10-year product opens for subscription today. People keep asking me what has changed, the real answer is nothing has changed. It is the same product AAA PSU target maturity structure is the same – indexation 2033. I think the responses to all our past three launches have been fantastic. So why try to fix something that is not broken?
For all the first-time investors, what is the exact process? How to go about it? Do you just get in touch with the broker and buy this?
There are two variants that always come up. There is an ETF that you can buy through your broker, if you have a demat account. For those who do not want to go this via a demat account, there is a fund of funds vehicle. It is just a mutual fund that invests in the ETF and if you prefer that format, then you can talk to your mutual fund advisor and reach out to our team if there are any questions.
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...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
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