Target maturity funds (TMFs) are passive-debt funds tracking an underlying bond index.  To learn more about target maturity debt funds, returns, the pros and cons of investing in them.

What are Target Maturity Funds?

Target maturity funds are passively-managed funds that make investments in bond securities. These funds come with a fixed tenor. 

 

The target maturity fund returns are linked with the performance of an underlying index like the Nifty SDL or the Nifty PSU Bond index.

 

In simple words, a typical TMF scheme features bonds having similar maturity timelines, with these bonds being constituents of the underlying index.

Pros of Investing in Target Maturity Funds

The following are some perks that you get to enjoy when you invest your money in TMFs:

  • Open-Ended Scheme: As these are open-ended schemes, you can liquidate your principal at any time, which would attract capital gains tax depending on the time of redemption

  • Interest Rate Risk: The movements in interest rates do not affect your target maturity fund returns because they follow an accrual strategy

  • Tax-Efficiency: In the long-term, these debt funds are taxed at 20% after indexation, helping investors earn higher net post-tax returns when compared to traditional investments

  • Flexibility: These funds are flexible and come with varying tenors, allowing you to identify pockets of yield for a given period

Cons of Investing in Target Maturity Funds

Here are a few downsides of investing in target maturity funds:

  • Lack of Performance Record: TMFs were launched only at the end of 2019 and, thus, lack a long record history. This makes it difficult for investors to establish a trend.

  • Interest Rate Risk on Early Redemption: If you decide to exit before the maturity date, you may miss a decreasing interest rate trend that may help you earn higher returns.

  • Fund Managers Have Limited Manoeuvring: Since these funds have a well-defined investment strategy, fund managers get little space to influence returns.

  • Passivity: TMFs rely on passive management, which is not exactly a drawback as you can use its simple and predictable strategy for your benefit.

Should You Consider Investing in Target Maturity Funds?

Target Maturity Funds come with interest rate risk if you exit before the end of the maturity period. Hence, make sure that you hold these funds until maturity for optimal returns. 

 

One of the prime reasons that investors are willing to take bets on these funds is because they allow simple, predictable, and low-cost passive management. Apart from that, being an open-ended fund, they do offer high liquidity too.

FAQs on Target Maturity Funds

How can I invest in target maturity funds?

You can invest in target maturity funds by heading to the ‘Mutual Funds’. Compare different funds and select the one with which your financial goals align.

What are the top target maturity funds with a tenor below 3 years?

While the top target maturity funds will vary based on several factors, there are a few notable options to consider. With a tenor below 3 years, the Bharat Bond ETF – April 2025, Bharat Bond ETF – April 2023, Aditya Birla SL CRISIL IBX – June 2023, are among some of the top target maturity funds worth considering.

How many target maturity funds are available in India?

Currently, there are 82 target maturity funds available in India. These include multiple series of Bharat Bond ETFs with different maturity periods.

What are the risks associated with target maturity funds?

Credit and interest rate risks are generally associated with debt securities. However, since target maturity funds only invest in high-quality funds, you can easily mitigate these risks.

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