look news india
For some time now, there has been continuous ups and downs in the domestic and global stock markets. In such an environment, retail investors who had invested money in equity mutual funds through Systematic Investment Plan (SIP) with high expectations, are seeing sluggish or in many cases flat returns. Common working people and middle class investors of all the major cities of the country including Uttar Pradesh, Delhi-NCR, Bihar, Maharashtra and Rajasthan are confused whether they should continue their ongoing SIP or shift their hard-earned money to some other financial option where there is complete guarantee of capital and returns are also available on time without any shock.
When the equity market is stuck in a tight range, the mutual fund portfolio does not look as bright as it did during the bullish period. In such a situation, financial advisors and market experts are advising to diversify the portfolio towards debt and fixed income securities instead of leaving the portfolio completely dependent on equities.
If you are stressed by the ups and downs of mutual funds, then the fastest growing option in the fixed income space right now is Target Maturity Funds (TMFs) And Sovereign/PSU Bonds Are. This option is proving to be most suitable for those investors who want to earn fixed profits in a fixed time frame while staying away from the stock market risks.
Target maturity funds are actually passive debt mutual funds. Their biggest feature is that they have a fixed maturity date, like 3 years, 5 years or 8 years. These funds do not invest your money in risky shares of any private company, but invest in Central Government Securities (Government Securities or G-Secs), State Development Loans (SDLs) of State Governments and AAA-Rated PSU Bonds issued by Navratna or Maharatna government companies of the country. This simply means that the risk of default in these is negligible i.e. close to zero.
The biggest strength of target maturity funds and government bonds is their yield to maturity (YTM). When an investor invests money in these, it becomes clear on the same day how much annual return he will get if he stays till maturity. In the current interest rate cycle, these funds are offering annual indicative yields ranging from approximately 7.20 percent to 7.75 percent.
Unlike equity mutual funds, there is no fear of NAV falling every day. If the investor maintains his investment till the maturity period of the fund, then whether the interest rates in the market increase or decrease in the intervening time, the investor gets the fixed profit at maturity. This is a great option for those who need a fixed fund in the next 3 to 5 years for children’s education, marriage or retirement.
Often new and inexperienced investors make the biggest mistake when they stop their SIP as soon as the market falls or exit by selling mutual fund units at a loss. The basic rule of financial discipline says that when the stock market is down, your SIP buys more units of the mutual fund in the same monthly instalment. This is called Rupee Cost Averaging.
When the market picks up again, these cheaply purchased units will give huge compounding returns to your portfolio. Therefore, instead of stopping the entire equity SIP, rebalancing your portfolio is considered the best strategy. For this you 60:40 asset allocation formula You can adopt a strategy in which 60 per cent of the money should be continued in equity SIP for growth and 40 per cent should be parked in target maturity funds, RBI floating rate bonds or high-yield bank FDs for stability and security.
Another great feature of target maturity funds is their liquidity. In traditional fixed deposits, if you withdraw money prematurely, banks charge you a penalty. In contrast, target maturity funds are open-ended, which means in case of an emergency, you can redeem your units at any time and get the money back in your bank account.
From a taxation perspective, after April 1, 2023, profits from debt mutual funds are taxed as per the investor’s respective income tax slab. Nevertheless, due to the high security, fixed tenure of investing in sovereign guaranteed assets and regular returns without any credit risk, this option is best suited for conservative investors who do not want to risk even a penny on their principal capital and are looking for a transparent medium better than or parallel to fixed deposits.