These debt mutual fund schemes give higher returns than FDs at low risk

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Key Highlights

  • These funds mostly invest in PSU bonds and state development loans so credit risk is minimum in these funds
  • On maturity of the fund, investors are returned their investment proceeds.
  • These schemes are open ended

New Delhi: Risk-averse investors looking for predictable returns, higher than fixed deposits (FDs) interest, with low credit risk can consider target maturity schemes for investment. This category of debt funds passively invests in bonds of a similar maturity constituting the fund’s benchmark index. On maturity of the fund, investors are returned their investment proceeds. This product is open-ended.

These funds hold a quality portfolio comprising government securities, PSU bonds and state development loans (SDLs). Credit risk in these papers is typically low. 

“These products work as a good substitute for investors with a five-year-plus time horizon looking to earn more than bank fixed deposits,” the Economic Times quoted Viral Bhatt, founder, Money Mantra as saying.

While a fixed deposit with a bank offers 5.0-5.5% for five years, investors could earn about 5.9-6.3% from a target maturity fund with a tenure of about six years.

“By investing in long maturity bonds of 5-6 years, investors can earn 150 to 200 basis points higher than short-term bonds. As and when yields rise, they will rise sharply in the short-term maturity segment than long term, thus reducing the MTM (mark to market) impact to some extent on longterm bonds,” the financial daily quoted as saying Niranjan Avasthi, head (products), Edelweiss AMC. Investors in such target maturity funds that mature in the next 5-6 years could earn anywhere between 5.9% and 6.3%.

Also returns from these funds are taxed at lower rates. If you hold these schemes for more than three years you get the benefits of indexation on long-term capital gains. While interest earned on FDs are taxed as per your slab rates, long-term capital gains from debt funds are taxed at 20% after adjusting your purchase price upward for inflation, a process, which is known as indexation.

Few funds in this category that can be considered for investment are Edelweiss Nifty PSU Bond Plus SDL Index Fund 2026 has a yield to maturity (YTM) of 5.90%; the new fund offer of ICICI Prudential PSU Bond Plus SDL 40:60 Index Fund that matures in September 2027 with a tenure of six years has a yield of 6.25%; the NFO of Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 2026 60:40 Index Fund has a YTM of 5.93%.

Some financial planners believe the product is best suited for investors planning for a goal.“Target maturity funds work well for investors who have a goal that matches the maturity of the fund or ends slightly before the maturity,” the financial daily quoted as saying Nirav Karkera, head of research, fisdom.