In these rough times, investors naturally tend to be less venturesome. Investor's appetite for stable returns has made debt funds the top flavour in recent times. And fund houses have worked hard to devise more interesting debt funds – today we have a wide choice of government or corporate bond funds of long and short-term maturity. And now, a newly crafted fund – Fixed Maturity Plan, which looks more like a bond shaped as a fund and insulates your money from interest rate volatility, if you hold till the end. These funds are born to counter the increasing interest rate volatility. Fixed maturity plans offer predictable returns for a predefined investment term.
These funds invest in portfolio of bonds, which normally mature in line with its defined period, are passively managed, with an eye on coupon income rather than trading profits. Thus, investors staying till the maturity of the fund earn the normal yield applicable on their investment tenure, without bothering about the mid-way volatility in prices of underlying instruments due to interest rate fluctuation.
Alliance, Chola, Grindlays, HDFC, Kotak, Magnum, Pioneer ITI, Prudential ICICI and Zurich India have launched their version of defined maturity plans in the recent past. The newest being Birla Sun Life and IL&FS. 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 low minimum entry 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 bonds 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 only be notional, not a real loss on maturity, unless ofcourse the fund loses on a credit default.
For the week ended October 19, 2001, the markets gained 57 points (1.9%) on the BSE Sensex while it moved up by 35 points (2.68%) on the BSE National Index. The top gainers for the week were – Taurus Discovery Stock (9.34%), Libra Taxshield '96 (6.52%) and Canexpo (4.87%). The only loser during the week was JM Basic, the petro fund which lost 0.93 percent.