Index Fund Inflows Gather Steam

The volume of index fund launches has gathered steam of late. In fact, at Rs 95,671 crore, index funds could possibly have received the highest inflows among all the mutual fund (MF) categories in the financial year (FY) 2022-23, as per recently released data.

Also, the majority of the inflows into index funds have been into target maturity funds (TMFs). In FY 2022-23, TMFs registered a net inflow of Rs 79,442 crore. This includes inflows of Rs 18,849 crore in March 2023 itself. 

TMFs are debt-passive mutual fund schemes that have a pre-defined maturity. They invest in bonds that mature on or before the maturity of the scheme.

TMFs are open-ended debt fund schemes, which had a total asset under management (AUM) of Rs 1.74 lakh crore in March 2023.

The structure of such funds works on decreasing residual maturity. This means with every passing year, the maturity of the underlying bonds continues to reduce. This way, the duration risk continues to go downward, however, the maturity date remains the same. The returns from the offering become predictable through this. 

TMFs provide returns with good visibility in the medium to long term. Considering the rate hikes, portfolio yields—the approximate rate at which interest accrues in debt funds—are significantly better.

These are ideal for investors who have a specific financial goal in their mind, which could be saving for retirement or children’s education. Since TMFs have a fixed investment horizon, these funds offer a predictable return profile. Considering that they invest in a diversified portfolio of fixed-income securities, this aids in spread risk. 

However, the net asset values (NAVs) of TMFs can be volatile depending on yield movements. As an investor, one should be prepared to face interim volatility.