Over the past many months of 2023, the Indian stock markets have seen high volatility and wiping off investor wealth to the tune of millions. This has pushed risk-averse investors towards debt instruments that are considered safer as compared to pure equities. However, with the recent budget changes in the taxation of debt funds, the returns from these instruments are not left as attractive. With the global interest rates on the rise to combat inflation, let us evaluate target maturity funds and fixed maturity funds as suitable investment options for investors.
Read More: Changes in tax benefits on debt mutual funds
What are Target Maturity Funds?
Target maturity funds are a type of passive mutual fund that tracks an underlying bond index with a defined maturity date. These funds invest in a basket of bonds, such as government securities or PSU bonds, and hold them until the maturity date. As the bonds in the basket pay regular coupons, the interest is reinvested in the same basket of bonds. At maturity, investors receive the principal amount along with the accrued interest.
Target maturity funds can be in the form of ETFs or Index Funds. While ETFs require a Demat and trading account and can be traded like regular ETFs, investors can invest in Index Funds without a Demat account but cannot trade them as in the case of ETFs. One of the benefits of target maturity funds is that they are virtually risk-free and investors can lock in current yields by holding the fund till the maturity date.
Some of the top schemes of target maturity funds for 2023 include,
- Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 26 60 40 Fnd (G)
- Bandhan CRISIL IBX Gilt April 2028 Index fund (G)
- BHARAT Bond ETF FOF April 2032 (G)
- Edelweiss NIFTY PSU Bond Plus SDL Apr 2027 50:50 Index – Direct Plan
- Axis CRISIL IBX SDL May 2027 Index Fund
- Kotak Nifty SDL Apr 2032 Top 12 Equal Weight Index Fund
What are Fixed Maturity Plans?
Fixed Maturity Plans (FMPs) are mutual funds that invest in fixed-income securities like bonds, certificates of deposit, or commercial paper that have similar maturity dates as the fund. This fund has a diverse maturity date ranging from a few days to years, usually 30 days to 5 years. These are close-ended funds with a fixed return on investment, which is known upfront to the investor.
Any changes in the interest rates do not have an effect on the returns from the fund. This makes them a less volatile or low-risk investment option as compared to other types of mutual funds, which may have to sell their securities before maturity to meet investor redemptions.
Investors who invest in FMPs need to keep their money invested for the entire tenure of the fund. This means that they cannot withdraw their investment before the maturity date of the FMP. However, if investors wish to exit the FMP before maturity, they can sell their units on the stock exchange to another investor through their demat account. The price at which they sell the units will depend on the prevailing market conditions.
What are the key differences between TMF and FMPs?
Target Maturity Funds (TMFs) and Fixed Maturity Plans (FMPs) are types of mutual funds that invest in fixed-income securities. However, they have a few significant differences that need to be understood to make suitable investment decisions. Given below are the key differences between the two.
| Category | Target Maturity Funds | Fixed Maturity Plans |
| Type of fund | TMFs are open-ended funds in the form of either index funds, ETFs, or Fund of Funds, investing in PSU bonds, AAA-rated corporate bonds, government securities, and state-development loans (SDLs). | Fixed Maturity Plans (FMPs) are close-ended debt funds with a fixed maturity period that invest in a range of debt instruments such as certificates of deposits, corporate bonds, commercial papers, non-convertible debentures, money market instruments, and government securities. |
| Expense ratio | The expense ratio of these funds is lower as they are in the nature of passive funds. | The expense ratio for FMPs is higher as compared to that of TMFs as the former are active funds. |
| Tradability | TMFs can be traded on stock exchanges when they are in the form of ETFs | Investors can invest in FMPs during the NFO period and they cannot be traded easily on stock exchanges like TMFs. |
| Liquidity | TMFs have higher liquidity as compared to FMPs | Investors in FMPs are required to hold their investment till maturity and it is a close-ended fund. Therefore, liquidity is lower as compared to TMFs. |
| Risk | TMFs usually invest in debt securities that are of a high rating and/or government-backed making them a safer investment option as compared to FMPs. | There is a higher credit risk in the case of FMPs as compared to TMFs due to the diverse class of assets that they invest in. |
| Target Investors | The target investors for TMFs are risk-averse investors with long-term investment horizons. | The target investors for FMPs are investors with higher risk appetite and short to medium investment horizons. |
What is a better investment option between TMF and FMP?
The choice of investment between the Target Maturity Funds and Fixed Maturity Plans cannot be a generalised answer as they cater to different classes of investors. Investors should consider the investment horizon and their risk appetite while choosing between the two. For investors seeking short-term investment options FMPs can be a good option as they are close-ended funds with lower liquidity while TMFs offer low-risk investment options with comparatively long-term investment horizons.
Conclusion
The comparison of TMFs and FMPs allows investors to understand the core differences between these debt mutual funds enabling them to make sound investment decisions. Debt mutual funds have been a favoured investment option for investors with lower risk appetite. The differences between TMFs and FMPs allow investors to understand their preferred investment options based on their individual parameters.
FAQs
Some of the key advantages of investing in target maturity funds include low-risk investment options, tax benefits, passive investment options, predictable and stable returns, etc.
TMFs and FMPs have the usual risks of investing in debt mutual funds. Some of the key risks include interest rate risks, credit risks, market risks, liquidity risks, and credit rating risks.
The expense ratio is higher in FMPs as compared to TMFs.
As per SEBI, the types of securities under TMFs include PSU bonds, AAA-rated corporate bonds, government securities, and state-development loans (SDLs).
