Mutual fund houses have been rolling out scheme after scheme, the past several months. Among the ones rolled out are also those that follow what is called the roll-down strategy. Two friends, Sita and Geeta discuss what it is.
Sita: All these years, I was made to believe that equity mutual funds (MFs) are risky and that debt MFs are a safe bet. Now I see debt MF returns fluctuating too. So, where do I invest?
Geeta: Why don’t you invest some money in a roll-down strategy MF scheme?
Sita: What’s that? Is that a scheme where hard-earned money rolls down from my pocket into the wallets of mutual fund houses! Just joking. Can you please explain?
Geeta: Sure. While debt fund returns may not gyrate as much as equity fund returns, they are not all safe. Debt investments suffer from interest rate risk – as interest rates go up, prices of existing bonds fall, hurting MF debt scheme returns. The reverse holds true too.
Target maturity funds and fixed maturity plans (FMPs) follow the roll-down strategy and help minimise the interest rate risk.
Sita: How do they achieve this?
Geeta: Such schemes invest in debt papers of a certain maturity and then hold them till maturity. As time passes, the maturity of these papers and so of the scheme portfolio gradually goes down. And with it, the interest rate risk.
Such schemes offer some degree of return predictability. On maturity, you are returned your original investment plus return.
Sita: From now on I’ll invest only in such schemes to get assured returns.
Geeta: Not so fast. These schemes promise only return predictability and not return certainty. They give you a fair sense of what your returns are likely to be and not what they will be. After all, debt MFs are market-linked products, and nothing is guaranteed.
Sita: I understand. Anything else that I should know?
Geeta: I forgot to mention – all this applies only if you stay invested until the end of scheme maturity.
If you decide to redeem your investment any time before that (of course, FMPs don’t allow premature exit), then the roll down strategy won’t save you from interest rate risk.
Your return can, then be higher or lower than that indicated at the start, depending on whether interest rates have fallen or risen since you invested.
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