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Article Summary
• Target Maturity Funds in India are open-ended debt funds that invest in debt securities, set to mature on or before the maturity date of the fund.
• They may be index funds or Exchange Traded Funds (ETFs) which track indices such as Nifty SDL and NSE PSU Bond Fund, investing in debt securities in the same proportion as the index.
• Depending on the index, Target Maturity Funds invest in government securities, State Development Loans (SDLs), PSU Bonds, and other debt securities and hold them till maturity.
• These debt funds can be considered for different investment periods as defined at the time of launch of fund, providing protection from interest rate movements during the fund’s term, besides offering low expenses and liquidity.
Debt funds can fulfil many short-term and imminent needs like meeting emergency needs, managing investment portfolio risk, and securing gains from growth investments like equity funds besides generating regular inflow. However, they also face many risks, including risks from interest rate movements, which may be more pronounced for longer-term debt funds since they invest in longer-term debt securities. Therefore, if the investors have a financial goal to be met over a defined term, to effectively manage interest rate risk over the term, investors can consider Target Maturity Funds.
What Is A Target Maturity Fund?
Target Maturity Debt Funds are open-ended debt oriented funds that invest in debt securities set to mature around the maturity date of the fund. Thus, if a Target Maturity Fund is set to mature 3 years from today, the maturity date of its debt securities will be on or before with the maturity date of the fund.
Target Maturity Funds in India are majorly index funds or Exchange Traded Funds (ETFs). These passively managed debt funds track and emulate indices such as Nifty SDL and NSE PSU Bond Fund. They invest in debt securities of the index, in the same proportion as the index. Depending on the index they track, such funds accordingly invest in government securities, State Development Loans (SDLs), PSU Bonds, and other debt securities generally higher-rated debt securities indicating low credit risk. They
generally hold these bonds till maturity.
Benefits of Target Maturity Debt Funds
Significant protection from interest rate changes Investors in Target Maturity Funds are tend to feel lesser impact of interest rate movements as debt securities are held till maturity as part of what experts call “roll down” strategy.
However, being open-ended funds, exit before the maturity date is possible but, in that case, investors are unlikely to benefit from the cushioning from interest rate movements.
Visibility of returns As the holdings of funds are usually held till maturity, investors get a good idea of the likely returns on maturity if they hold their investments for the tenure of the fund
Low expenses Since the Target Maturity Funds are managed passively and are mostly Index or exchange traded funds, they bear less expense ratios relative to actively managed funds.
Easy liquidity Being open-ended funds, investors can enter or liquidate units at any time during the tenure of the fund.
How to Use Target Maturity Funds
Match investment period with expected needs Target Maturity Funds are ideal for financial goals matching with the tenure of the funds. Let us take the example of a child's higher education.
Depending on the anticipated requirement, you can adopt two well-known fixed income strategies.
First, is the “bullet strategy” where you regularly invest in Target Maturity Funds, with all of them maturing at the time you need money. This could be for upfront lump sum expenses. Second, for regular lump sums for annual and other expenses during the period, you could adopt the “ladder” strategy. This involves investing in Target Maturity Funds that will regularly mature during the period of higher studies.
Manage overall portfolio risks Target Maturity Funds can be helpful when you intend to lower the overall risk of the investment portfolio as interest rate risk gets largely reduced.
What To Consider When Investing In Target Maturity Debt Funds
Check the term of the fund Investors should check the maturity date of the fund before investing to align with their investment horizon and financial goals
Evaluate risks and fit with financial goal Before investing in Target Maturity Funds in India, evaluate the risks of the fund’s investments and its appropriateness for a financial goal.
Get qualified financial advice Target Maturity Funds involve reducing interest rate risk if stayed invested for the tenure of the fund. A better informed decision is possible with the help of a qualified financial advisor with an understanding of interest rate cycles.
FAQs
How do Target Maturity Funds compare with Fixed Deposits (FDs)?
While FDs are offered by banks and Non-Banking Finance Companies, Target Maturity Funds are offered by mutual funds. The investments in Target Maturity Funds are market-linked, hence they have potential to generate better returns than conventional FDs. Furthermore, these funds do not have any lock-in period unlike FDs, and investors can enter or redeem their units any time, however, it is suggested that investors stay invested for the tenure of the fund to have better experience from their investments
How do Target Maturity Funds compare with Fixed Maturity Plans (FMP)?
FMPs are close-ended debt funds wherein investors can enter only at the time of launch of scheme, with an option to enter through secondary markets during the fund’s term, however secondary market liquidity is very low in case of these funds. Unlike FMPs, Target Maturity Funds are open-ended schemes with a maturity date and investors can make transactions on any business day during the tenure of the scheme, providing these funds a liquidity advantage over FMPs.
Disclaimer:
The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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