You could look at bond funds that mimic FMPs in their portfolio holding style but are open ended.
In the past few months, the Indian bond market has seen some sharp swings with the southward bias in prices, and hence yields have hardened. Given the situation, investors who are conservative and have low risk-taking ability are asking financial planners and advisors if they should invest in bond funds when the prices of bonds are low. And by doing that if they can lock-in investments at higher rates (yields).
A section of the market believes that with the rising trends for yields having stabilised for now, there may not be much slide from the current levels, and hence investing in bond funds at the current level could be a good proposition. According to financial planners and advisors, there are three factors that investors should consider while investing in bond funds at the current level. Firstly, with yields at higher levels benchmark yields on 10-year government securities is at around 7.8% compared to being around 7.15% at the start of 2018__they could lockin higher yields and hence get higher income. Secondly, they should look for high quality portfolio and not expose themselves to incremental credit risks. And lastly, if they remain invested for more than three years, under the current tax rules, they can enjoy indexation benefits which can potentially boost their post tax returns.
Industry people say such investors could look for fixed maturity plans (FMPs), which serves to lock-in higher yields, mostly for three years and hence investors can reasonably guess how much return they could expect at maturity. However, in FMPs, the illiquidity factor is a big bother for investors since these schemes, despite being listed on the exchanges, hardly have a secondary market.
So the alternative for such investors__who prefer some visibility about their returns__could be bond funds which are open-ended but are managed like FMPs. Such schemes could address the liquidity issue associated with FMPs by allowing investors to withdraw their money, partially or fully, in case investors suddenly need some money. There are bond funds which invest in high quality corporate papers with a residual maturity of threefour years and holds those papers. And as and when new money is invested in the scheme, the fund manager buys bonds of lesser residual maturity. In such funds the investors can reasonably estimate the returns they would receive after three-four years. At the end of the third year, investors can also enjoy indexation benefits, which again can bring down their post-tax returns substantially. In case the investor does not need money after three years, he/she could wait for a few more months or a year to enjoy more indexation benefits, fund industry officials said.
This article has been exclusively created for UTI SWATANTRA