Is it advisable to invest in target maturity debt exchange traded funds in SIP format? - Kunal Garg
We, at Value Research, always advise to go for the SIP route when it comes to investing in equity mutual funds.
So is it advisable to invest in target maturity funds via SIPs? Let's find out but first understand what target maturity funds are.
What are target maturity funds?
Target maturity funds are passively managed open-end debt funds that have a set maturity date. Such funds buy and hold securities similar to the underlying debt index. To give an example, if a target maturity fund has a maturity in 2027, it will invest in debt securities maturing around the same time.
In the last few months, target maturity funds have seen a lot of traction from the investors because of the visibility of returns. Given the construction of target maturity funds, they are protected against the interest rate risks if investors continue to hold the investments till maturity. The expected return is indicated by the yield-to-maturity (YTM) metric.
In the current scenario when the interest rates are at peak, it makes sense to invest in target maturity funds and 'lock-in' a rate of return. Investors should look at such schemes if they match their investment horizon. For instance, if investors want to invest in such funds now for three years, they should look at the funds maturing around 2025-26.
Conclusion
Typically, systematic investment plans (SIPs) are the best bet for equity funds as investors get the benefit of rupee cost averaging. It basically means that investors get units at various prices as equity markets are volatile.
Since target maturity funds are debt funds and debt funds are not as volatile as equity funds, and the main aim to invest in target maturity funds is to 'lock-in' the rates. Therefore, one can easily invest in a lump sum way in target maturity funds.
Suggested read: Where can I check the performance of target maturity funds?
This article was originally published on January 06, 2023.
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