Dynamic Bond Fund, Target Maturity Fund or FD: Where to bet amid rising rates?

Abhishek Bisen, Head – Fixed Income, Kotak Mahindra Asset Management Company

We are nearing the peak of rates. At this point we believe Dynamic Funds target maturity and score better than FDs. Earning yield is same in both given flat curves (target mat and dynamic) but dynamic funds can extend duration and give better risk adjusted returns in falling rate scenario as it emerges over next 18m.

Gautam Kalia, SVP and Principal Super Investor at Sharekhan by BNP Paribas

Dynamic bond funds change the portfolio maturity according to the interest rate scenario while target maturity funds and bank FDs have fixed maturity date.

With interest rates at relatively high levels, investors with a tenure of around 3 years can go with dynamic bond funds as the potential for capital gains is high when interest rates start falling (but it comes with interest rate risk ).

Investors looking for steady returns can go with target maturity funds as they provide liquidity with potential for capital gains as compared to bank FDs but with some short term volatility.

CA Manish P. Hinger is the Founder at Fintoo

Based on the current global trends, it is advisable to keep two things in mind while thinking about your investment strategy. First, global inflation is still present, although it is slowly abating. Second, inflation is still high in some areas, which means interest rates may not have peaked yet. However, we are nearing the end of this cycle.

Keeping all these things in mind, it is a good time to start allocating some of your funds to fixed-income investments. If you already have a fixed income allocation, it may be worth considering a slightly longer time horizon for your investments. This strategy can help you take advantage of the current interest rate environment and potentially generate higher returns while minimizing risks.

Keeping in view the current interest rate scenario, it is advisable to invest in a combination of Target Maturity Fund and Dynamic Bond Fund. This strategy can help investors take advantage of rising interest rates while mitigating the risks associated with market volatility.

Target Maturity Funds are passive investment structures that allow investors to capture peak interest rates virtually. With target maturity funds, there is a defined maturity date, which provides a high degree of certainty with regard to interest rates.

On the other hand, dynamic bond funds act as strong complements to target maturity funds because of their flexible mandate. Fund managers can buy bonds with maturities of two to three years, and if interest rates rise, they can buy bonds with maturities of five to seven years. Additionally, they can toggle between corporate and government bonds as needed.

Abhinav Angirish, Founder, Investonline.in

Targeted Maturity Funds (TMFs) are debt funds that are passively managed and designed to mirror the performance of a specific bond index. These funds are becoming popular among conservative investors. An Asset Management Company (AMC) invests in a portfolio of bonds and not just in a single bond, thereby diversifying the portfolio.

These investments have a known maturity. Investors who buy target maturity funds lock in an interest rate and stand to reap benefits from it regardless of the state of the economy as a whole, provided the money is held till maturity. Target maturity funds are open-ended and do not have any lock-in period, so investors can withdraw their money at any time. They do not require investors to commit capital for a set period of time, but a buy and hold (to maturity) approach is still advised.

Since TMFs are not actively managed, the expense ratio is typically between 10 and 50 basis points. TMF is designed to track bonds that pay interest (coupons) on an ongoing basis and are included in the index. The fund reinvests bond coupons and gains through compounding. On the maturity date, the original investment and all the interest earned is returned to the investors.

Target maturity funds give better post-tax returns if held till maturity. But if they are held for a shorter period, they can give returns similar to fixed deposits.

Harsh Gahlaut, CEO of Finage

With the steep hike in rates over the last few cycles by the RBI to rein in inflation, bond yields have moved up the yield curve. In such a scenario, it certainly makes sense to invest in target maturity funds with a residual maturity of 4-5 years, as one can expect returns of around 7.4% to 7.5% CAGR from them.

Since TMF’s bonds track indices, they invest almost entirely in GILTs and SDLs, thereby eliminating the possibility of credit shocks. TMFs are passive and follow a roll down strategy, which means they basically do not take active credit or term calls within their portfolios. An investor who buys today and holds the fund until its maturity can be reasonably well assured that they will earn the YTM they are buying if they hold it to maturity. Also, TMFs are open ended and allow access to capital which is why they score over other roll down funds like FMPs.

In the current environment a TMF can be expected to beat the existing FD rates on pre and post tax basis, as they offer indexation benefits which FDs do not. When it comes to the Dynamic Bond Fund, we are not very optimistic as it is very difficult to take duration calls in this type of environment, so we are not entirely comfortable with an active duration management strategy, especially when such Attractive returns can be achieved. from a TMF.

Ravinder Voomidisingh, CFA, COO, IndiaP2P

Among these 3 options, the comparison isn’t really apples-to-apples, although the current environment compels investors to view the fixed-income market favorably. While interest rates and inflation have eased globally, there is still some way to go.

Targeted Maturity Funds (TMFs) are debt funds that are passively managed with pre-defined maturities. As an investor, you can lock-in an attractive rate of interest with TMF and lock it in easily. TMFs are riskier than bank FDs but still come with reasonable visibility of returns. Dynamic Bond Funds (DBFs) on the other hand are actively managed and play on the changes in interest rates. They can be an effective way to balance and hedge your TMF investments.

However, look at these options only after understanding the underlying fees and taxation.

Sagar Lele, Wealthbasket curator and founder of Roopeeting

The past two years have been marked by high volatility and rapid changes in policy direction globally. The rate enhancement has been unique in both quantum and velocity. And while the dust may settle for a few months, a policy reversal is likely by the end of the year.

Dynamic Bond Fund would be our preferred choice given the fact that the duration of the macro cycle has been short. The professional management and agility that they offer is what is needed to make the most out of the current environment. A portfolio built by investing in a bunch of target maturity funds or laddering bank FDs limits the ability to quickly reduce the duration of the portfolio without adding more capital, especially when trying to reduce the duration Are.

Yash Joshi, Co-Founder and Director, Uppercrust Wealth

Dynamic bond funds are mutual funds that invest in a diversified portfolio of bonds with varying maturities and credit ratings. These funds can offer higher returns than bank FDs, but they also carry a higher risk. They are suitable for investors who are willing to take moderate to high risk for the potential for high returns. In the current interest rate scenario in India, where interest rates are expected to remain stable for some time and decline in future, dynamic bond funds can provide better returns than bank FDs.

Target maturity funds are also mutual funds that invest in a diversified portfolio of bonds, but with a specific maturity date. They are suitable for investors who want to lock in their investment for a specific period and are looking for predictable returns. Target maturity funds may offer slightly higher returns than bank FDs, but less than dynamic bond funds. They are suitable for conservative investors who want to invest in fixed income instruments and have a low risk appetite. In the current interest rate scenario, target maturity funds may not be the best option.

Bank FD is a low-risk investment option that offers a fixed rate of interest for a specific tenure. They are suitable for investors who want to invest their money for a fixed period of time and earn predictable returns. Bank FDs are ideal for conservative investors who want to invest their money in a safe and secure investment option. However, in the current interest rate scenario in India, where interest rates are expected to remain stable and fall further, bank FDs can provide moderate returns with security.

In summary, the choice between Dynamic Bond Funds, Target Maturity Funds and Bank FDs will depend on your investment goals and risk appetite. In the current interest rate scenario in India, dynamic bond funds can give better returns than bank FDs, but they also carry higher risk. Target Maturity Funds may not be the best option, and bank FDs can provide moderate low risk returns. It is important to consult with a financial advisor to determine the best investment options for your specific situation.

Vishal Vij, Founder and Managing Partner, Nesteg

With most banks increasing their FD rates, investing in FDs is a safe and reliable option for very conservative investors to generate predictable returns. However, the interest earned is subject to taxation at the maximum marginal rate.

TMFs, which are passive debt mutual funds that invest in government securities, state development loans, PSU bonds, or a combination of these, offer high predictability and tax benefits after three years from the date of purchase. These funds are suitable for investors with an investment horizon of 3 years or more.

Dynamic bond funds are an excellent option for debt investors looking for more aggressive investment options. These funds invest in debt securities of short and long durations, although returns can be more unpredictable for shorter durations. However, they tend to perform well in a falling interest rate environment. Suitable for a time horizon of 3 to 5 years.

Satyen Kothari, Founder & CEO, Cube Wealth

The option you choose will depend on the time horizon you have in mind. In the current market scenario, Fixed Deposit would be the first choice followed by Target Maturity and Dynamic Bonds.

While RBI’s stance is neutral, there are global concerns about debt and dynamic bonds which carry higher risk than FDs.

Nirav Karkera, Head of Research, Fisdom

For investors with visibility over the time horizon for investing in fixed income products, target maturity funds offer a strong value proposition. Approximate matching of the investment tenure with the target maturity of the product can be a straightforward way to start. For long-term fixed income allocators, choose dynamic bond funds with reliable structures and fund management teams that can offer relatively higher risk-adjusted returns over the long term. Here the scope for active management provides incremental performance. For investors seeking to maintain an accessible corpus for the very near term or towards such a goal, bank fixed deposits offer great value.

Ashok Chhajer as CMD of Arihant Superstructure

With bank FD rates rising steadily with some leading banks even offering 7.75% for senior citizens, it makes sense to lock in this rate. However, rates are likely to increase by another 50 bps in the next 6 months. Target Maturity Fund is good for others as it offers bond yield of around 10 years with indexation and tax benefits.