Dhaval Kapadia, Director, Portfolio Specialist, Morningstar Investment Adviser (India) answers queries in The Financial Express, from where the below has been taken.
Is it safe to invest in debt funds maturing in 90 days? What happens after the fund matures?
– Samir Aich
Debt funds with fixed maturity dates are typically referred to as Fixed Maturity Plans, or FMPs. FMPs are launched with varying maturity dates including 90 days, 1 year, 2 years, 3 years, etc.
Such funds invest in debt instruments which have the same maturity dates as that of the fund.
Since the underlying debt securities are held to maturity, the impact of fluctuations in the price of a debt instrument due to a change in market interest rates is eliminated.
Another key risk associated with debt instruments, credit risk or the risk of default on repayment of principal or interest by the issuer, can be reduced by investing in FMPs that invest in securities with high credit ratings (AA+ and above).
FMPs are suitable for investors who want to invest in low risk debt instruments and require liquidity after a pre-determined period of time.
On maturity of the fund, AMCs typically offer an option to either exit the investment or roll it over for another period.
