The economy's slowing, the political outlook is cloudy, and the bull market that turned the most casual equity investor wealthy is gone, gone, gone. Last year's winners are today's biggest losers. Tech stocks? Down 46% in 2001 on BSE IT Index. The broad market is off 24% on the Nifty. The only winners of 2001: Bonds Up 10.77 per cent till date. It can't get more dull than this. As debt funds remain the flavour of the times, fund houses have worked hard to devise more interesting debt funds. The latest in series of are - defined maturity plans, which aim to deliver predictable returns for a predefined investment term.
Alliance, Chola, Grindlays, HDFC, Kotak, Magnum, Pioneer ITI, Prudential ICICI and Zurich India has launched their version of defined maturity plans in the recent past. Of these HDFC has a minimum investment of Rs. 1 crore, Alliance has Rs. 50 lakh and SBI Magnum has a minimum of Rs. 10 lakhs. The remaining funds have a lower entry minimum ranging between Rs. 5 lakh and Rs. 5000. Generally, 3 months, 1 year and 3-years term funds are on offer.
The key advantages of investing in a bond fund vis-à-vis investing in bonds directly is the easy access, superior liquidity, daily pricing, ease of reinvestment, professional management and diversification. However, for these benefits you also have to compromise on few benefits of investing in bonds directly. One, you incur cost when you invest in a fund, and the returns you get is expense adjusted. You also don't get the predictable return in a bond fund as in a bond. And often, you diversify extensively in a bond fund, which may be unnecessary.
Defined maturity plans invest in fixed income instruments bearing a similar term and stick to their initial investments till end. The maturity of the plans range from a week to 2-3 years. What sets them apart from a plain bond or gilt fund is a defined investment basket, superior return than an ordinary open-end debt, predictable returns, low annual recurring expenses but a high exit cost.
These funds combine the key benefits of investing in debt funds and also the benefits of investing in bonds directly. By their structure, they deliver predictable return than a bond funds and they don't diversify extensively. They are also likely to be cost effective, as these funds will invest in securities and hold till their maturity, incurring lower transaction cost and recurring expenses. All this will translate into enhanced return to investors. However, these funds are suited only for investors with a clearly defined investment horizon, as interim exit from the fund will attract stiff exit load.
They also guard a fixed-term investor from volatility of a bond fund. As changing interest rates affect the prices of underlying fixed income securities, lending volatility to a typical bond fund. But defined maturity funds invests and wait till the maturity of the debt instrument. Hence any loss in value in the interim will be notional and will not be a real loss on maturity, unless ofcourse the loss is on account of credit default.
Fund Update: For the week ending August 17, 2001, the market lost 19.50 points (-0.59%) on the Sensex and 2.89 points (-0.19%) on BSE National Index. The top gainers were ING Growth Portfolio (+3.40%), UTI Software (+3.12%), K-Tech (+2.95%) and Pioneer ITI Prima (+ 2.87%). The top losers were JM Basic (-2.02%), UTI Petro (-1.65%), Dhansamriddhi (-1.52%) and Reliance Growth (-1.27%).