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What are Target maturity funds

  February 26,2022

Want inflation-beating predictable returns? Check out Target Maturity Funds   

Are you looking for a mutual fund that gives you predictable returns without stock market investments? You may look at target maturity funds.

Target maturity fund is a type of debt mutual fund that invests in high-quality bonds that mature within four to seven years.

What are target maturity funds?

Target maturity funds are debt mutual funds where fund manager invest in high credit quality bonds that mature within a specific period. Currently, it ranges from four to seven years. These funds are passively managed funds as it invests in similar bonds as per their benchmark index.

As the maturity period of these funds is fixed, the fund’s average portfolio maturity decreases as it inches closer to the maturity date. This is roll down strategy.

What are the advantages of target maturity funds?

Here are some of the advantages of target maturity funds:

Low expense ratio: As the structure of target maturity funds is like passive funds, they have a comparatively low expense ratio.

High creditworthiness: Target maturity fund mainly invest in government bonds, state development bonds, and PSU bonds. The credit risk in these funds is negligible as these securities have high creditworthiness.  

Predictability of returns: One of the major selling points of these funds is their return predictability. Investors can expect to earn indicative yields if they stay invested in the fund till maturity. Please note that no mutual fund can guarantee returns.

In the current scenario, the indicative yields of these funds hover around 6%. We see that the newly launched target maturity funds are aiming at a five to seven-year time horizon. In the current economic scenario, fund managers and market experts believe the timeframe will help investors get reasonable returns.

Different from Fixed Maturity Plans (FMP): It may seem that FMPs and target maturity funds are similar. However, there are a few differences between them. FMPs are close-ended and have an investment horizon of three to five years. Moreover, you can only invest in FMPs during the New Fund Offer (NFO) period.

On the other hand, target maturity funds are open-ended funds, and most funds mature within five to seven years. So, unlike FMPs, target maturity funds are highly liquid as you can invest and redeem units of target maturity funds at any time.  

Indexation benefits: Investors who stay invested for more than three years get indexation benefits. Indexation aims to reduce the impact of inflation on your investment gains. So, you can get more benefit if you cross a higher number of year-ends.

What are the limitations of target maturity funds?

Interest rate volatility  is one limitation of target maturity fund. These funds invest in longer duration bonds. Funds with longer duration carry higher interest rate risk than short term funds as it is difficult to predict the movement of future interest rate. So, when the interest rate moves up, and the price of bonds fall, the returns from the fund may inch lower.

Who should invest in target maturity funds?

So, now that you know about the advantages and disadvantage of target maturity funds, let us see who should invest in target maturity funds. 

· You may invest in target maturity funds if you are looking to stay invested the entire duration.

· You may also invest if you have a financial goal that matches the fund's time horizon.

· Target maturity funds may also be a good option for long-term investors who want to invest in a debt fund.

· Individuals in the higher income tax brackets can invest in target maturity funds as an alternative to fixed deposits. 

Conclusion: Target maturity funds is a new concept in the Indian mutual fund sector. It is a debt fund and may give predictable returns. You may invest in target maturity funds if you have a financial goal that fits the fund's timeframe. Contact us to know more.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.