Boston mutual-fund behemoth Fidelity Investments announced Wednesday that it has launched the Fidelity Defined Maturity Funds, a series of four municipal income funds, each with a defined maturity date.
The company says the funds “seek to bridge the gap between individual bonds and bond funds, and are the first actively managed municipal bond defined-maturity funds in the market.”
According to the company, the funds are open-end and seek to incorporate attributes of individual bonds. They will invest primarily in investment-grade municipal bonds that are generally clustered around the funds’ defined end dates. They’ll seek as high a level of current income and, like municipal bonds, are exempt from federal income tax. The Defined Maturity Funds will close to new purchases approximately 12 months prior to their maturity date. Each fund then plans to liquidate and distribute its net assets to investors shortly after the maturity.
“When compared to a traditional bond fund, the price volatility of the Defined Maturity Funds is designed to decline as their underlying bonds approach their maturity,” Mark Sommer, the funds' co-manager, said in a statement. “However, unlike individual bonds, these funds do not return a pre-determined amount at the funds’ defined end dates.”
He added the funds are appropriate for income-seeking investors who are interested in combining the defined-maturity feature of individual bonds with features of bond funds, including diversification and professional management, which removes much of the legwork of individual bond investing. Investors could use the funds in three potential ways: as an income vehicle, an investment vehicle, or as a laddering opportunity.
Generate a federally tax-free income stream: The Defined Maturity Funds seek to provide federally tax-exempt income via monthly distributions, which investors have the option of withdrawing as income. While the distribution amounts will fluctuate, the funds may be an appropriate option for investors looking to receive monthly income for their cash flow needs.
Reinvest to maximize payout potential: Investors could choose to reinvest distributions in order to maximize a fund’s payout potential at maturity. While the funds do not guarantee a pre-determined amount, their declining price volatility as their defined end dates approach may help investors plan for their financial needs, if they hold the funds to maturity.
Build bond ladders for ongoing income: Investors and institutions use bond ladders to attempt to generate income streams for prolonged time periods. But building bond ladders with individual securities can be costly and time consuming. With the Defined Maturity Fund series, investors have the ability to create a laddering strategy by investing in multiple funds across a range of maturities.
Sommer was hired by Fidelity’s Fixed Income Quantitative Group in 1992 and was appointed portfolio manager in 1997. He currently manages both state-specific and national municipal bond funds. He will be joined by Kevin Ramundo, who joined Fidelity in 2000 as a research analyst and in 2010 was appointed portfolio manager, and Jamie Pagliocco, with Fidelity since 2001 and appointed portfolio manager in 2006.