Impact of change in interest rate on target maturity passive debt fund

Conservative investors are increasingly looking to open-ended target maturity funds for predictable returns with liquidity. According to industry experts, this is due to low profits from various fixed income products.

In comparison, the default risk of the target maturity fund is lower than that of other debt funds because they invest in public sector company bonds, state development debt and government securities. In addition, over time, the duration of these funds decreases as they become less volatile due to changes in interest rates.

Goal Maturity Fund helps investors plan their investments for 5 years.

Impact of interest rate changes

When investing in bonds, changes in interest rates play an important role in what an investor can earn in that bond.

Niranjan Awasthi, Head – Products & Marketing, Edelweiss Asset Management, explains: “Rising interest rates have led to lower bond prices and, therefore, investors in debt mutual funds are often concerned when interest rates start to rise. As we are witnessing now. The Target Maturity Passive Debt Fund assists investors in managing this risk. “

Industry experts say that when investing in debt mutual funds, investors usually look to predict returns and this is the goal of maturity passive debt funds.

“Since it has a fixed maturity date and invests only in bonds that are consistent with the maturity of the fund, there is no interest rate risk for an investor who invests in this fund and invests till its maturity,” the statement said.

It’s like investing in a bond and holding it up to maturity regardless of whether the interest rate goes up or down. Since you do not sell this bond, the returns on this bond are not affected by interest rate changes that may occur occasionally.

Experts say that Target Maturity Passive Debt Fund thus offers investors a stable and predictable return. “Usually returns can be closer to YTM where someone has invested in this fund,” Awasthi said.

Although short-term interest rate fluctuations may affect NAV, such as in a bond, “the impact is negative if one invests until maturity,” the statement concluded.