The Indian stock markets have shown a remarkable performance over the past few weeks and have risen to new heights. Yet there is still a major section of investors who prefer to stay away from equities and call it a game of gambling. Such investors usually prefer to invest in debt instruments as they are considered to be less volatile and also provide stable returns. However, finding and analyzing individual debt instruments can be cumbersome for average investors. Target Maturity Funds are a good solution to this issue. So what are these funds and why is investing in these funds a good option? Check out this blog to know all about Target Maturity Funds and related details.
Read More: Difference between Target Maturity Funds & Fixed Maturity Plans
What are Target Maturity Funds?
Target Maturity Funds belong to the debt mutual fund category and are funds with a specified maturity date that is aligned with the maturity date of the instruments in the fund. These are passive funds and are in line with index funds or ETFs as they track the underlying bond index.
These funds primarily invest in Public Sector Undertakings (PSUs), state development loans (SDL), G-secs, and other similar bonds. These funds are open-ended mutual funds that allow easy entry and exit for investors.
In Target Maturity Funds, the bonds held in the fund’s portfolio generate regular interest payments, known as coupons which are reinvested in the fund contributing to the overall returns of the fund. At the end of the investment period (maturity date), investors receive the principal amount they initially invested along with the accumulated interest earned from the reinvestment of coupons. This combined amount represents the total payout to investors at maturity.
Who should invest in Target Maturity Funds?
Target Maturity Funds are ideally a good investment option for investors with low-risk appetite and seeking a stable and fixed source of regular income. These funds are suitable for investors with medium to long-term goals that match the maturity date of the fund. These funds invest in notified securities with virtually no risk and also belong to the passive investment category, therefore, they are also a suitable option for investors who want to avoid any credit risk and ensure liquidity as well as get tax benefits along the way.
How are Target Maturity Funds taxed?
Target maturity Funds being part of the debt mutual fund category are taxed on similar lines. As per a recent amendment in the taxation on debt mutual funds, any gains from the sale of units of a debt mutual fund that has 35% or less allocation to equity will be taxed as short-term capital gains irrespective of the holding period. Therefore, gains from the target maturity Funds falling in this category will be taxed as per the amended tax provisions on debt mutual funds.
What are the benefits of investing in Target Maturity Funds?
Some of the benefits of investing in Target Maturity Funds are below.
| Category | Details |
| Predictable returns | TMFs offer a specific return expectation at maturity, providing investors with clarity in their investment outcome. |
| Lower interest rate risk | These funds aim to hold bonds until maturity, minimizing the impact of interest rate fluctuations on the portfolio’s value. |
| Lower expense ratio | TMFs often have lower expense ratios compared to actively managed debt funds, as they do not require frequent buying and selling of securities. |
| Passive investment strategy | TMFs follow a passive strategy, aiming to replicate the performance of a fixed-income index. This is particularly attractive for risk-averse investors seeking professional management yet free of any bias. |
| Diversification | By investing in a basket of debt instruments, including government securities and corporate bonds, TMFs offer diversification, reducing concentration risk. |
What are the risks of investing in Target maturity Funds?
Investing in Target Maturity Funds (TMFs) comes with several risks to consider. TMFs lack an actual performance history and track record, making it challenging to assess their reliability and historical performance. These funds can be prone to tracking error, meaning there may be differences between the fund’s actual returns and the benchmark’s returns, potentially affecting its performance relative to the benchmark.
Additionally, investing in TMFs exposes you to interest rate risk, especially if you decide to sell before maturity, which could lead to reduced returns. While TMFs aim to invest in high-quality securities, there is still some level of credit risk involved, as defaults on the underlying bonds could impact the fund’s performance. Despite efforts to reduce interest rate risk, fluctuations in interest rates can still affect the returns of TMFs. Therefore, as an investor, it is essential to carefully consider these risks and conduct thorough research before investing in TMFs.
Conclusion
Target Maturity Funds are considered to be among the safer investment options than equity mutual funds or hybrid mutual funds. While this can be a significant investment incentive for risk-averse investors, the returns from the same are lower in comparison as well. It is important for investors to understand the fund performance and its various parameters efficiently to make an effective investment decision.
FAQs
Some examples of target maturity funds in India are Kotak Nifty SDL Apr 2032 Top 12 Equal Weight Index Fund, Bharat Bond FOF – April 2031, Bandhan CRISIL IBX Gilt April 2028 Index Fund, and DSP Nifty SDL Plus G-Sec Jun 2028 30:70 Index Fund.
TMFs can invest in notified securities that include Government Securities, PSU bonds, State Development Loans, highly rated corporate bonds, etc.
Target Maturity Funds belong to the passively managed funds category.
Some of the key differences between TMFs and FMPs include the lower expense ratio of the TMPs, higher liquidity of TMFs as they are open-ended funds, lower credit risk as compared to FMPs, etc.
