AMCs line up differentiated target maturity funds amid stiff competition

Yield-to-maturity between 7.36% and 7.5% for these schemes with fixed tenure makes them attractive bet

With target maturity funds becoming one of the top investment options in the fixed income space, asset management companies (AMCs) are coming out with differentiated target maturity funds to present a better risk-reward proposition, maximise yields, and also to make their product stand out in a sea of offerings.

Target maturity funds, which first started as fixed-tenure open-ended debt funds investing in papers of AAA-rated public sector companies, now have at least 10 varieties, if one looks at the asset mix of the portfolios. 

There are now schemes that exclusively invest in gilt, state development loans (SDL), or AAA-rated corporate papers. Beyond these, there is another range of schemes that has a different mix of these papers like Nifty AAA Bond Plus SDL 50:50 Index and CRISIL IBX 70:30 CPSE Plus SDL Index.

According to industry officials, fund houses have been forced to ideate new types of schemes, given the rising competition in this space. 

“There is a cut-throat competition. Every AMC wants its scheme to have the highest possible yield-to-maturity (YTM) to be able to attract high inflows, and are hence forced to experiment,” said a top MF executive. 

“Variety is always good, especially in a country that is used to saying aur dikhao when buying things,” the executive said.

At present, the different mix of assets has not led to a major difference in either past returns or in YTMs, which are a good indicator of future returns. There are five schemes maturing in 2025 and YTMs of all the three are in the range of 7.36 per cent-7.5 per cent, according to Value Research data.

According to experts, diversified assets also help reduce risks in the portfolio. Generally, SDLs offer better yield than central government securities (G-sec) but they come with liquidity risk. This is why most target maturity funds limit their exposure to SDLs to 50 to 60 per cent.

“SDLs generally offer better returns but they are not very liquid. In case of large redemptions, yields may take a hit if liquidity is poor,” said Rahul Jain, senior V-P Research at International Money Matters.

According to investment advisors and analysts, retail investors should not put too much thought into the asset mix when selecting a target maturity fund and go with an offering that has a maturity in line with its investment horizon.

“The difference in returns is generally not more than 20-30 basis points, whether it's SDL, gilt, or AAA PSU. Hence, retail investors shouldn’t look too much into it. This can make a significant difference in returns only if the investment amount is large,” Jain said.

“In target maturity, the maturity date is the most important aspect. The asset mix isn't very important unless the investor is very risk-averse and is only comfortable with central government securities,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors.

Target maturity funds are passively managed debt funds that come with a specific date of maturity. 

They offer predictable returns if the investor stays invested until the date of maturity.

Fund houses are battling for dominance in this space as the passive debt fund category is pitched to emerge as the preferred fixed-income investment option for retail, as well as institutional investors. Fund houses have launched close to 50 schemes in this category in the past year, taking the total count close to 70.

Going by the filings for new fund offerings with the markets regulator, Securities and Exchange Board of India, this trend is likely to continue.