Mumbai: Several fund managers and financial planners said the rise in bond yields is likely to present an opportunity for rich investors to earn a return of 6.5% in target maturity schemes over the next five years.
They believe investing in a mix of such schemes that mature between 2026 and 2028 will offer the best risk-adjusted returns for investors.
Target maturity funds give investors visibility of return if held till maturity.
Some of the target maturity funds that financial planners recommend are: ABSL SDL PSU Bond Sep 2026 60:40, which invests in a mix of SDL and PSU bonds and matures in 2026; Nifty PSU Bond Plus SDL Index Fund-2026, which invests in a mix of PSU bonds and SDLs; and Gilt 2027 Index Fund and IDFC Gilt 2028 Index Fund that invests only in government securities.
“Inflation could moderate in the US…(and) recent steps by the Indian finance minister to cut fuel prices will have a favourable impact,” said A Balasubramanian, CEO of Aditya Birla Sun Life Mutual Fund. “While some growth concerns remain, the 10-year bond yield which already discounts a steep hike should stabilise around 7.3-7.7%.”
Balasubramanian believes the flat yield curve between 5 and 10 years looks good to lock into target maturity funds.
After the sharp rise in bond yields, the spreads between the 10-year benchmark and the 5-year government security have narrowed to 23 basis points. Currently, the 10-year benchmark trades at 7.45%, and the 5-year government security trades at 7.22%. Given this, financial planners believe investors would do well to invest in schemes that mature around five years from now.
“Investors would get the best risk-adjusted returns for target maturity schemes that mature in 2026-2027,” said Niranjan Awasthi, head-product at Edelweiss Mutual Fund.
These schemes have a defined maturity and passively invest in bonds of similar maturity, constituting the fund’s benchmark index and giving visibility of returns. On maturity of the fund, investors are returned their investment proceeds. Since they are open-ended, there is intermittent liquidity and investors can buy and sell at NAV. They have high-quality portfolios consisting of G secs, PSU bonds and state development loans (SDLs), all of which carry low credit risk. The expense ratio is 15-20 basis points in direct plans and 30-40 basis points in regular plans, thereby lowering the cost for investors.
“Assuming 5% inflation, subtracting expense ratio and accounting for indexation benefits for holding beyond three years, investors could make a post-tax return of close to 6.5% on these funds,” said Rupesh Bhansali, head-distribution at GEPL Capital.
Financial planners recommend target maturity funds as investors have been struggling with their fixed income portfolios for the last year, as bond yields rose by 142 basis points and eroded returns.
As per data from Value Research, investors have made a 2.03% return in corporate bond funds and 0.55% return in gilt funds.