How similar are target maturity funds to term deposits

amount of banking deposits was 175 trillion by 2 December 2022. This is a substantial number, and naturally so. The savings population, especially in semi-urban and rural areas, has an affinity for bank deposits. At the same time, there is a positive trend of financialization of savings, which is not only in bank deposits, but also in managed investment vehicles such as mutual funds, retirement funds, alternative investment funds, etc. TMF is an investment product in Mutual Funds. Fund space that matches the simplicity of a bank deposit. Let’s take a look at the similarities between the two.

In TMF, there is a defined maturity date which is similar to a fixed deposit. For the sake of clarity, in a normal open-ended debt fund, while you can make withdrawals anytime, the funds remain there. It is only your contribution that you are withdrawing.

In TMF, the entire fund matures on the specified date and the money comes back to the investors. Another basic parameter that defines a bank deposit is the committed rate of return. It gets a little trickier in the mutual fund space. As per SEBI regulations, MF products cannot be sold on the basis of expected returns as they invest in the market. As we all know that the market is prone to volatility. That is, there may not be a ‘printed’ rate of return on TMFs that can be compared with deposits. Having said that, there is a high degree of visibility of returns in TMF.

The portfolio yield-to-maturity (YTM), available in the month-end factsheet, gives an approximate idea of ​​the interest rate being earned on the instruments in the portfolio. The reason for the volatility of returns in debt funds is that bond prices move every day. The effect can be favorable when market prices rise, and vice versa. However, in a TMF, the instruments in the portfolio mature along with the maturity of the product. On maturity, you get back the face value of the bond, which is independent of the movement of the market price at that point of time. So the portfolio YTM, which is publicly available data, is not really a committed return, but gives you an idea of ​​what you can expect. In TMF, there is a high degree of correspondence between portfolio YTM and expected return due to the maturity of the securities commensurate with the maturity of the product. Also, there is a portfolio recurring expenditure, which is publicly available. For a closer perspective, it can be subtracted from the portfolio YTM.

Another factor that will be topmost in the mind of investors is safety. Bank deposits have a committed rate of return. This is not contingent on the NPA level of the bank. However, in case of mutual funds, the risk lies with the investor. If there is a credit crash, the loss will not be borne by the MF. From this perspective, the credit quality of available TMFs has, at least for the time being, been top notch.

The portfolio consists of either government securities which have zero default risk, state government securities classified as G-Secs by the Reserve Bank of India (RBI), or AAA rated bonds of public sector undertakings, or consists of a combination of Hence, investors need not worry on the security aspect of TMFs.

Liquidity is relevant; Bank deposits can be terminated at any time, but premature withdrawals can attract a penalty. TMFs are liquid. If they are in the form of ETFs (Exchange Traded Funds), they have to be sold on the exchange. If they are in the form of an index fund, the purchase and redemption happen with the asset management firm like any other open-ended fund.

conclusion: After the hike in interest rates by the Reserve Bank of India, the portfolio YTM of funds as well as the rates on bank deposits have gone up. In TMFs, as long as you have a horizon of three years or more, you get tax efficiency, which gives you higher net-of-tax returns than bank deposits.

Joydeep Sen is a Corporate Trainer and Author.