Target maturity debt funds score over FMPs. Let us look how.
FMPs were popular among investor when interest rates were higher. However, with declining interest rate scenario, the demand of FMPs among investors has declined substantially. Another drawback of FMP was liquidity. While FMPs are listed on stock exchanges, practically, there are no takers.
One key advantage of FMPs is that volatility reduces with each passing day. In other words, the residual maturity i.e. time remaining for maturity of the fund reduces the impact of interest rate risks on underlying securities.
In recent times, the concept of target maturity funds has been gaining popularity. These are open-ended funds with a defined maturity date. Like FMPs, these funds ensure that the maturity of the instruments in the portfolio matches with the maturity of the scheme. However, target maturity funds have three main advantages over FMPs:
- Most FMPs have maturity period of 3 years. Target maturity funds offer maturity ranging between 3 years and 10 years
- Volatility reduces with each passing day (Similar to FMPs but for longer duration)
- Adequate liquidity
Currently, target maturity funds are structured in three different ways:
- ETFs: While target maturity ETFs are low cost instruments, this structure does not offer adequate liquidity. Only a large lot size (creation unit) executed through AMCs are liquid. Also, you have to mindful of other costs associated with ETFs like brokerage amount, demat changes and so on
- Index funds: This structure offer adequate liquidity as AMCs are responsible for liquidity. Overall cost in this structure is to the extent of the TER
- FoFs: A few AMCs offer FoF by investing in ETFs of target maturity funds. Here fund house is liable to provide liquidity. However, keep in mind the inherent costs like TER of underlying ETF along with TER of the FoF
Conclusion
Investors can get benefits of liquidity through index funds and FoF structure. ETFs as concept have been gaining popularity and hence, its liquidity would improve with time. You can pick and choose the maturity that suits your cash flow requirements.
Currently, the portfolio credit quality of these funds are superior. Portfolios comprise government securities, state development loans (SDLs) which are quasi-sovereign and AAA rated PSU bonds.
Finally, in line with other debt schemes, these funds also offer indexation benefits if held for over 3 years.
Source: https://cafemutual.com/news/guestcolumn/537-should-you-recommend-target-maturity-funds-to-fmp-investors