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A Comprehensive Guide to Target Maturity Funds: An Inflation-Beating Investment Option

Are you on the hunt for a mutual fund investment that offers reliable returns without delving into stock market investments? Target maturity funds could be your ideal choice. See below for the What Are Target Maturity Funds Things to Know in detail

What Are Target Maturity Funds Things to Know

Target maturity funds are a type of debt mutual fund that primarily invests in bonds of high quality, which mature within a span of four to seven years. These are passively managed funds, where investments align with similar bonds according to their benchmark index.

As these funds have a predetermined maturity period, the average portfolio maturity of the fund decreases as it approaches the maturity date, a strategy known as ‘roll down’.

The Benefits of Target Maturity Funds

Here are some notable advantages of investing in target maturity funds:

• Lower expense ratio: As target maturity funds resemble passive funds structurally, they often come with a lower expense ratio.
• High creditworthiness: These funds primarily invest in government bonds, state development bonds, and PSU bonds, which carry high creditworthiness, thus minimizing credit risk.
• Predictable returns: One of the chief attractions of these funds is their ability to offer predictable returns. If investors stay invested until maturity, they can expect to earn indicative yields. However, remember that no mutual fund can guarantee returns.

In the current market conditions, the indicative yields of these funds are approximately 6%. New target maturity funds aim for a five to seven-year horizon, which experts believe will yield reasonable returns under the current economic climate.

How Target Maturity Funds Differ from Fixed Maturity Plans (FMP)

While FMPs and target maturity funds might seem similar, they do have distinct differences. FMPs are closed-ended with an investment horizon of three to five years, and investments are only possible during the New Fund Offer (NFO) period.

Conversely, target maturity funds are open-ended, with most funds maturing within five to seven years. This makes them highly liquid as investors can invest and redeem units at any time.

Indexation Benefits

Investors staying invested for more than three years can enjoy indexation benefits. Indexation aims to lessen the impact of inflation on investment gains, providing more benefits the longer you stay invested.

Potential Drawbacks of Target Maturity Funds

One potential downside of target maturity funds is their susceptibility to interest rate volatility. These funds invest in bonds with longer durations, which inherently carry higher interest rate risks than short-term funds due to unpredictable future interest rate movements. Consequently, when interest rates rise and bond prices fall, fund returns may decrease.

Who Should Consider Investing in Target Maturity Funds?

Given the pros and cons of target maturity funds, let’s identify who might find them a suitable investment:

• Investors planning to stay invested for the entire duration.
• Those with a financial goal aligning with the fund’s time horizon.
• Long-term investors seeking to invest in a debt fund.
• High-income individuals seeking an alternative to fixed deposits.

Wrapping Up

Target maturity funds, a relatively new concept in the Indian mutual fund sector, are a type of debt fund offering predictable returns. They could be a viable investment option if your financial goals align with the fund’s timeframe. For more information, feel free to reach out to us.