Over the years, investors have switched 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 weighs 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 turning to the benefits of the maturity fund, let’s see what is the distinctive feature of this category of debt funds.
Target maturing funds have a specified maturity date, and the maturity date of the bonds in your portfolio is aligned with that maturity date. Therefore, the duration or maturity time of the fund continues to decrease over time. In addition, all bonds in the portfolio are held to maturity.
The first and most promising advantage of TMFs is their relative immunity to changes in interest rates. Because the portfolio is held to maturity and has a reduction duration, it is less sensitive to changes in interest rates along the way.
Second, TMFs have better yield visibility than the rest of debt funds since the bond portfolio is held to maturity. This keeps return expectations in line with the fund’s return at maturity (YTM) at all times. Third, being passive in nature, target maturity bond funds distribute their funds according to the composition of the underlying bond index. So the portfolio of these funds tends to be heavily invested in government bonds that make up the majority of bond indices in India. Currently, maturing funds have a mandate to invest in government bonds, PSU bonds and state development loans. This reduces the default and credit risk of TMFs compared to other debt funds.
Because target maturity funds are open-ended and available as index funds or ETFs, they offer more liquidity especially than FMPs that are not traded frequently. They also offer more flexibility in terms of maturity profile so that investors can choose a fund whose maturity date best suits their investment horizon.
Investors looking to stay invested for some time and who have expectations of a stable return should consider adding a Target Maturity Debt Index fund or target maturity ETFs to their principal debt fund investment portfolio.