Target Maturity Funds (TMFs) or Target Maturity Debt Funds are a type of open-ended debt mutual fund that comes with a defined maturity date. This is because the fund manager of a TMF invests in a set of bonds that mature on or around the fund’s maturity date. Because TMFs simply track a bond index and do not require too many changes over time, they are typically considered passive funds.
Also Know More About What are Open Ended Mutual Funds?
You can consider TMFs as a good option for investment if you have a specific financial goal based on your requirements, such as retirement or your child’s education. You can use these funds to earn higher returns than traditional fixed-income investments, such as fixed deposits (FDs).
List of Target Maturity Funds include Kotak Nifty SDL April 2032, SBI Crisil IBX Gilt Index Fund June 2036 and Mirae Asset Crisil IBX Gilt Index Fund April 2033, among others.
How Do Target Maturity Funds Work?
As you know, TMFs invest in a portfolio of bonds with a set maturity month and year. Over time, as the maturity date that you had chosen approaches, the overall duration or time to maturity of the overall bond portfolio falls. As a result, the interest rate risk for your fund starts to decrease overall. This process is called rolling down maturities.
To maintain their desired risk profile, Target Maturity Funds mostly invest in the following types of bonds, as per SEBI guidelines:
- Government securities
- State Development Loans
- PSU bonds
Why Should You Invest in Target Maturity Debt Funds?
Since TMFs are bond investments, holding the investment till maturity will give you a risk-free return. This is especially because TMFs invest in bonds of central and state governments or PSUs, and both have less chance of default. Since these are open-ended funds, you can still redeem them anytime. But in that case, you would be exposed to risk from changes in interest rates and consequent changes in the value of the bonds.
Advantages of Target Maturity Funds
You can get some of the following advantages by investing in target maturity funds:
- Predictable returns: You can earn predictable returns using TMFs. This is because the fund manager is investing in bonds with a set rate of interest and a known maturity date. Since you are indirectly investing in bonds that are offered by central and state governments, they have a low risk of default. This can be helpful if you are planning for a specific financial goal that you want to reach with low risk.
- Reduced interest rate risk: TMFs help you to reduce interest rate risk by rolling down maturities. This means that your fund’s exposure to interest rate changes is reduced over time.
- Diversification: To diversify your investment portfolio, you can invest in TMFs as it will balance against other risky investments with volatile returns. This is because TMFs are typically less volatile than equity funds, and thus, they can stabilise your portfolio.
- Tax efficiency: You can enhance the tax efficiency of your investments if you hold them for the long term. If you hold your investment for more than 3 years, you will be taxed at a lower rate on any capital gains. This is because traditional investments like fixed deposits are taxed at around 30%. However, the TMFs are taxed at 20% post-indexation when invested for over 3 years.
- Liquidity: You can consider TMFs as fairly liquid investments, as you can redeem your units anytime. However, it is important to note that you may have to exit at a loss if you redeem your units before the fund’s maturity date.
- Low cost: Since TMFs are passively managed, the expense ratio of the TMFs tends to be low. This means that your net returns will be higher for a given investment.
Disadvantages of Target Maturity Funds
You may face some of the following disadvantages for investing in Target Maturity Funds:
- Limited flexibility: Because the fund manager is investing in bonds with a known maturity date only, they are less flexible with their investments. This means that you cannot exit the fund early without the possibility of incurring a loss in case interest rates increase too much.
- Reinvestment risk: You may also be exposed to reinvestment risk in TMFs. This is the risk that interest rates may fall after you invest in a fund. This could lead to lower returns for you. This is because the fund manager will have to reinvest the proceeds from maturing bonds at lower interest rates.
How to Invest in Target Maturity Funds?
To invest in target maturity funds, you can open an account with a broker with an online investment platform and then invest in the mutual funds that you prefer via that platform.
Are Target Maturity Funds a Good Investment?
Overall, target maturity funds can be a good, low-cost investment for investors who are looking for low-risk predictable returns. Thus, they suit investors with a specific financial goal. However, it is important to note that TMFs are not without risk.
How Do Target Maturity Funds Compare to Other Types of Investments?
Target maturity funds can be compared to other types of investments in a number of ways.
| Compared to | Returns | Flexibility |
| Fixed deposits | TMFs offer the potential for higher returns than fixed deposits, but they are also subject to more risk. | TMFs are more flexible than fixed deposits, as you can redeem your units at any time. However, you may have to exit at a loss if you redeem your units before the fund’s maturity date. |
| Dynamic bond funds | TMFs offer the potential for more predictable returns than dynamic bond funds. This is because TMFs invest in a portfolio of bonds with a known maturity date, while dynamic bond funds invest in a portfolio of bonds with different maturities and durations. | Target maturity funds are designed with a specific maturity date and each constituent on bond matures in or around the same time.
However, dynamic bond funds have the flexibility to actively manage the duration of their portfolios. |
| Equity funds | TMFs offer lower returns than equity funds, but they are also subject to less risk. | TMFs are more flexible than equity funds, as you can redeem your units at any time. However, you may have to exit at a loss if you redeem your units before the fund’s maturity date. |
Conclusion
Carefully consider your own investment goals and risk tolerance before investing in any type of mutual fund. If you are new to the stock market, open a Demat account with Angel One, India’s top investment platform!
FAQs
Are target maturity funds safe?
Target maturity funds can give risk-free returns with low taxes and expense ratios if held to maturity. However, if you withdraw from the fund before maturity, then there is the risk of loss if interest rates have risen since you invested.
What is the level of return offered by target maturity funds?
The level of return as such varies between funds. However, it is safe to say that target maturity funds offer returns which may not be as high as those offered by the top equity funds. However, their returns may be quite at par with the returns from standard fixed deposits or more.
Who should invest in target maturity funds?
You can consider investing in target maturity funds if you are seeking predictable returns and you are fine with staying invested for more than 3 years, preferably until maturity.
What are the best target maturity funds 2023?
The best target maturity funds would be those which offer a high interest rate and are hard to be surpassed by future bond issuances in the capital markets. That way, not only do you get a higher return, but also, your bond portfolio is less likely to lose value if you decide to withdraw before maturity.
