Home >Money >Personal Finance >Are target date index funds a good alternative to banks FDs?

Some asset management companies (AMCs), including Edelweiss and IDFC, have launched target date index debt funds recently. These are passive funds which invest in the same securities as the underlying index and have a limited tenure.

Edelweiss has launched a NIFTY PSU Bond Plus SDL Index Fund - 2026. The fund will mature in 2026. The fund invests in debt papers of AAA rated public sector papers and state development bonds (SDL) in equal proportions. Another fund house IDFC has launched two target maturity gilt index funds -- IDFC Gilt 2027 Index Fund and the IDFC Gilt 2028 Index Fund. Nippon India has launched an exchanged traded fund Nifty SDL - 2026 which will invest state development bonds of 20 states or union territories with equal weightages. Only those bonds which will mature between 1 May 2025 and 30 April 2026 will be part of the index that the ETF will track. Both funds invest most of their assets in central and state government securities.

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As these funds invest in sovereign papers or highly rated papers PSU bonds, the credit risk (the risk of default) comes down to close to zero. However, as these funds invest in longer duration papers, the interim returns will be impacted by the interest rate changes. It can be mitigated by holding the funds till maturity. We asked experts if they think these can be a good alternative to bank FDs.

Vishal Dhawan is a certified financial planner and founder of Plan Ahead Wealth Advisors, a Sebi-registered investment advisory firm

These could be possible alternatives to investors looking at longer duration fixed deposits at this point, considering their higher tax efficiency and hold to maturity strategy. These funds are ideal for investors who are in higher tax brackets, due to the higher tax efficiency that they offer due to long capital gains tax treatment with indexation, rather than getting taxed at marginal rate in a fixed deposit. It is also suitable for those investors who have a long investment horizon and are unlikely to need these monies before the maturity date. The low expense ratios of these funds also make them attractive. Investors would be exposed to mark-to-market risks in the interim, as the underlying securities could see changes in capital values, both on the upside and downside, when interest rates change. Thus, they are exposed to interest rate risk in the short term, but if investors hold these instruments till maturity, the interest rate risk would be mitigated.

Joydeep Sen, corporate trainer and author

The concern of bank FD investors is about safety. After the spate of defaults, starting with IL&FS, continuing with DHFL and many others, the concern is exacerbated. These index funds with portfolios comprising sovereign i.e. G-Secs and SDLs are risk free and suitable from that perspective. It is important that the investors hold these funds till maturity as if the investors don't hold till maturity, it is subject to some mark-to-market volatility.

Santosh Joseph, founder, Germinate Investor Services LLP, a mutual fund distributor

It is a well-diversified investment, with quality securities from good issuers available as a total portfolio. Since these are largely issued by PSUs and Government, the credit risk is mitigated. The other advantages are convenience of investing, liquidity, transparency and ease of transacting across many securities in one shot. Since these are index fund, you don’t need a Demat account and can be invested or held physically unlike an ETF. These funds give tax efficient returns compared to FDs as they provide indexation benefit on long-term capital gain. For investors looking for an alternative or diversification from FDs these are great avenues that offer quality portfolio and stable yields with simplicity.

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