You’d know by now that every good portfolio needs a solid debt or fixed-income component. It’s the stabilising force that keeps things from going totally haywire when the markets start acting crazy. Well, guess what? The current interest rate environment is perfect for investing in fixed income. You can benefit from higher rates while minimising risks related to market fluctuations. Win-win!
Before you go running to the nearest bank to put all your money into a fixed deposit, hear us out. FDs are stable and safe, but they also come with an inconvenient little (or not so little) tax implication. TDS is applicable on the interest, which will also be taxed each year at your prevailing tax slab. Not something you’d want to deal with, right?
That’s where our superhero comes in – Target Maturity Funds (TMFs). These funds invest in high-rated bonds and government securities and hold onto them until maturity. This means that their returns are more predictable than other long-term debt funds, making them an attractive low-cost option.
When compared to debt funds, TMFs come with a few nifty perks. One – protection from credit risk since they only invest in the government sector and PSUs. This guarantees you’ll get your money, so there’s almost no chance that your investments will go ‘poof’ because the company issuing the bonds went bankrupt.
Two – when held until maturity, TMFs also provide protection against interest rate risk – the risk that fluctuating interest rates will ultimately affect the fund’s NAV and impact your returns. A problem many long-term debt funds face.
All this is great, but where do you start? We at Scripbox recommend the right TMFs for you to invest in, carefully selected to ensure the lowest possible interest rate risk and credit risk. And here’s a bonus – if you invest before March 31st, 2023, you unlock another year of indexation benefits, which means you pay less capital gains tax. So why not invest in TMFs now and make the best of your investible surplus?