What are the advantages of investing in target maturity funds?

A mutual fund is a professionally managed company that collects the money of many investors and invests it in securities such as stocks, bonds and short-term debts, equity or bond funds, and money market funds.

Mutual funds are a good investment for investors who want to diversify their portfolio. Instead of focusing everything on one company or sector, a mutual fund invests in different securities to try to minimize portfolio risk

The term is typically used in the United States, Canada, and India, while similar structures around the world include the SICAV in Europe and the open-type investment firm in the United Kingdom.

Over the years, investors have moved from traditional savings products such as fixed deposits, PPFs, and post office savings schemes to debt funds in search of better tax-adjusted returns. However, the uncertainty of returns and the risk of losing their capital weigh heavily on them as they make the change. Target maturity funds (TMFs) are passive debt funds that offer several advantages over other debt funds, including FMPs

Before moving on to addressing the benefits of maturity funds, let’s see what is the distinctive feature of this category of debt funds. Target maturity funds have a specified maturity date and the maturity date of the bonds in your portfolio is aligned with this maturity date. Therefore, the duration or expiry time of the fund continues to decrease with the passage of time. In addition, all the bonds in the portfolio are held until maturity

The first and most promising advantage of TMFs is their relative immunity to changes in interest rates. Because the portfolio is held until maturity and has a reduction duration, it is less sensitive to changes in interest rates along the way.
Secondly, TMFs have better visibility of the return than the rest of the debt funds because the bond portfolio is held until maturity. This keeps return expectations in line with the fund’s return on maturity (YTM) at any time. Third, since they are passive in nature, target maturity bond funds deploy their funds based on the composition of the underlying bond index. So the portfolio of these funds tends to be heavily invested in government bonds that make up most of the bond indices in India. Target maturity funds currently have the mandate to invest in government bonds, PSU bonds and government development loans. This reduces the default and credit risk of TMFs compared to other debt funds

Because target maturity funds are open and available as index funds or ETFs, they offer greater liquidity, especially compared to FMPs, which are not often traded. In addition, they offer greater flexibility in terms of the maturity profile so that investors can choose a fund whose maturity date best suits their investment horizon.
Investors who want to remain invested for some time and have expectations of a stable return should consider adding the target maturity debt index fund or target maturity ETFs to their main debt fund investment portfolio

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How are target maturity funds different from FMPs?

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Are the debt funds right for my financial goals?