What are Debt Index Funds? How are they Beneficial?
Many people are not aware of these types of Mutual funds Let us find whether the present trend in Debt Index Fund can Enhance the Investor's PortfolioIt is well-known that the key to generating optimal risk-adjusted returns and achieving your financial goals is to create a well-diversified investment portfolio. This can be accomplished by investing in a variety of instruments that are spread across the risk-return spectrum. Generally, equity investments are considered vehicles of long-term wealth creation while debt investments are expected to provide steady returns with downside protection.
As we have seen in the previous post about the risks that are associated with debt mutual funds, let us categorize the benefits of these funds
An ideal solution:
As an investor, you have the option to invest in a wide variety of debt instruments ranging from different categories of debt mutual funds to bonds. However, an ideal solution that can help you combat many of the above risks is a Target Maturity Debt Index Fund. This is a debt investment option that has the features of a bond, i.e., defined maturity and predictable returns, if held till maturity, and has additional features that can help you address the challenges related to liquidity and accessibility. The Target Maturity Debt Index Fund with PSU bonds and SDLs as underlying scores over other investment avenues by packing several benefits in one product. These include:
Due to the quality issuer (PSUs) and defined maturity, the returns from the Index fund become more predictable. These funds' issue-related risk is minimal since the investment is largely in government and PSU bonds. The interest rate risk is minimized through a target maturity structure that will bring predictability in returns if you stay invested till maturity. A defined or target maturity means that the bonds in the portfolio will mature within a fixed term.
Predictability of returns: Due to the quality issuer (PSUs) and defined maturity, the returns from the Index fund become more predictable. These funds' issue-related risk is minimal since the investment is largely in government and PSU bonds. The interest rate risk is minimized through a target maturity structure that will bring predictability in returns if you stay invested till maturity. A defined or target maturity means that the bonds in the portfolio will mature within a fixed tenure
Easy and low-cost access:
Predictability of returns: Due to the quality issuer (PSUs) and defined maturity, the returns from the Index fund become more predictable. These funds' issue-related risk is minimal since the investment is largely in government and PSU bonds. The interest rate risk is minimized through a target maturity structure that will bring predictability in returns if you stay invested till maturity. A defined or target maturity means that the bonds in the portfolio will mature within a fixed tenure
Easy and low-cost access:
Unlike in ETFs, you do not need to transact through a Demat account to buy or sell units in an index fund. You can simply purchase the units through the fund house like you would for any other mutual fund scheme.
Liquidity: Since you can easily transact through the mutual fund house to buy and sell units in the Index fund, you need not worry about liquidity in exchange for transacting.
Liquidity: Since you can easily transact through the mutual fund house to buy and sell units in the Index fund, you need not worry about liquidity in exchange for transacting.
What are passive debt funds?
- These funds aim to replicate the underlying index in terms of portfolio and risk. In other words, the securities in the portfolio are similar to that in the benchmark index, both in terms of issuer and maturity range.
- Since the funds are passively managed, they are relatively low cost compared to actively managed debt funds.
- Target Maturity Funds are a kind of debt Passive that have pre-defined maturity and invest in bonds that mature on or before the maturity of the scheme. Such funds offer better visibility of returns and aim to provide a stable investment experience.
Passive Investing: A long-term bet?
As we have observed Investors have two main investment strategies to generate returns on their investment, Passive investing and Active investing.
Passive investing minimises buying and selling activity and replicates a specific benchmark
or index (it may be Debt or Equity)
Active investing requires frequent buying and selling
Passive funds are cheaper and have a lower expense ratio
Actively managed funds have a higher expense ratio as compared to passive funds
Passive Funds are Replicating benchmark/ index returns
Active Funds are expected to Outperform benchmark/index returns
Why passive investing is on the rise?
They have higher participation from retail, domestic institutional, and foreign portfolio investors
Simplicity: Owning an index, or group of indices is far easier to implement and comprehend than
a dynamic strategy that requires regular monitoring and rebalancing
Passive investing is subject to total market risk Vs an individual portfolio manager's risk
Passive investing via indexing is an excellent way to achieve diversification
And last but not least Lower fees and operating expenses than actively managed funds
Disclaimer: It is sufficient to conclude that there are times when Passive Funds have outperformed actively managed funds and vice-a-versa. Hence, it needs to be carefully decided when and how much to invest in Passive Funds for which your investment advisor can help.
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