The case for debt passives: Focusing on fixed income
PremiumTM funds make fixed income investing more fixed and give it a Fosbury flop moment
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A few weeks ago, I hosted a Twitter Spaces session on fixed income investing for retail investors. When the time came for Q&A, a young guy—all of 25-30—asked me how he should go about picking a debt fund. Around the same time, I had a conversation with a family friend who was looking to park money for two-three years, where capital safety was of utmost importance and wanted my urgent advice on debt funds.
Fixed income investing should be easy, but it isn’t. Throw in durations, yield curves, credit policy, inflation and the Fed into the mix and it’s no surprise the ordinary investor gets confused. Very few investors understand even basic bond concepts such as duration, the best evidence of which is the number of queries we get on the few days debt funds are down because of a sharp rise in interest rates. We don’t get that many queries when a small-cap fund falls 4-5%. It makes sense: equity investors were brought up on an appetite of knowing companies and understanding markets, but debt investors are essentially fixed deposit (FD) investors who were used to a simple decision-making process with few variables. You have savings accounts for parking money, and you have FDs with different durations. Choose the tenor, pick the rate, and you are done. It’s simple and it’s passive.
Now, passive is not an unfamiliar word and there isn’t a day when I am not asked about “active vs passive". Passive has always, in the Indian context, however, alluded to equity, in the context of disappearing alpha. While that debate over alpha in equities can continue well beyond the word count of this article, if there is one asset class that is suited for passive, it’s fixed income. For one, in fixed income, consumers care about simplicity, the number one benefit of passive funds. Second, costs matter more in fixed income, where 10 bps count, particularly in a low interest rate regime. And finally, if we dig into the fixed income products that have been successful in mutual funds, they happen to be passive—fixed maturity plans (FMPs) that were closed ended buy-and-hold funds, and rolldown funds (buy-and-hold strategies usually run in existing open-ended funds). The flexi-cap equity equivalent in bond funds, the dynamic bond category which has an active mandate, is small in size.
When the Bharat Bond mandate gave our team at Edelweiss AMC an opportunity to launch India’s first passive corporate bond fund, we spent months thinking about what the structure should be. Should we create a passive equivalent of short-term funds? Should we create a mixed duration version of the dynamic bond fund? Or should we create a gilt fund equivalent? After studying many global models, we finally chose the target maturity (TM) fund, an open-ended passive fund that had a targeted date on which it matured, like 2026 or 2027. These funds bought bonds of a certain rating/issuer quality maturing in a certain year and held them till maturity. Because they had a defined maturity, their yield was, one, known upfront, and, two, reasonably certain if an investor stayed till maturity. In doing so, they provide an experience that mirrors that of an FD or bond, packaged with the liquidity and tax efficiency of an open-ended debt mutual fund.
Cut to today, two years after the Bharat Bond launch, debt passives are a ₹40,000 crore business for Edelweiss AMC, and 8-10 AMCs have either filed or launched target maturity debt passive funds. And while passive strategies have existed in mutual funds, the TM framework makes communication and decision-making a lot easier. Index yields and portfolios are known upfront—unlike an FMP, and the strategy and maturity year is defined and written in stone.
In 1968, in a totally different world of Olympics, the high jump changed forever, when Dick Fosbury challenged conventional techniques and landed head-first in a back-layout style jump. Since then, almost everyone who has set any kind of record in high jumps has used the “Fosbury flop". The Indian consumer has always loved the mantra, “kitna deti hai?" and in the case of fixed income, add “kitne time mein?" In being able to answer these two questions, TM funds may just make fixed income investing a little more fixed and give it a Fosbury flop moment.
Radhika Gupta is the managing director and chief executive officer of Edelweiss Asset Management Ltd. The views expressed here are the author’s own.
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