Looking to beat FDs? Bet on lower end of yield curve

Mumbai: Investors looking for a low-cost passive debt option that can generate a higher return than fixed deposits while assuring robust safety in an investment time horizon of 15-33 months can consider the series of target maturity funds that are on offer from Aditya Birla Sun Life Mutual Fund.

The fund house will issue a series of seven such target maturity funds, with tenures ranging from 15-33 months as it believes yields are still lucrative at the lower end of the yield curve. Investors in such schemes could earn a spread of 50-80 basis points over sovereign government securities or fixed deposits.

New fund offers (NFOs) for two such schemes have already been launched with five more expected in the coming days. These schemes will build a portfolio of 10-12 securities comprising a mix of AAA-rated non-banking finance companies (NBFCs) and housing finance companies (HFCs) with exposure to a single company not exceeding 15%.

Financial planners believe these target maturity funds offer investors a chance to earn more than bank deposits with high liquidity. These schemes won't have any lock-in or exit load, and they can be redeemed on any working day, giving investors good liquidity.

Target maturity funds are passive debt funds tracking an index of debt instruments. These funds closely replicate the composition of the underlying index. Unlike other open-ended mutual fund schemes, target maturity debt funds have specific maturity dates, and investors holding units of target maturity funds eventually get the principal amount back.

While a bank fixed deposit of 1-3 years could yield investors 7-7.25%, a portfolio of AAA-rated NBFCs plus HFCs could give around 8%. After adjusting for an expense ratio of 15 basis points, investors could earn 60-80 basis points more than a fixed deposit. Financial planners believe such a product could work well for those eyeing liquidity and eyeing short-term goals.

"This product works for investors who want a fixed return, are in tax brackets, and wish to take advantage by locking in funds at higher interest rates before the rate cut cycle begins," said Amol Joshi, founder of Plan Rupee.