Should You Invest in Target Maturity Funds to Beat Inflation?

Are you looking for an inflation-beating return without investing in the stock market? Do you seek investment for the long-term? You may consider investing in target maturity funds. It is a debt mutual fund scheme that puts your money in bonds that mature in four to seven years. You have retail inflation measured by the Consumer Price Index (CPI), jumping to 5.03% in February because of rising food and energy prices. It helps if you invest your money in a financial instrument that may offer an inflation-beating return over some time. Should you invest in target maturity funds to beat inflation?

What are the target maturity funds?

You may consider target maturity funds as debt mutual fund schemes that invest in bonds of a high credit quality with a defined maturity period ranging from four to seven years. It is a passive investment in bonds of similar maturity constituting the benchmark index of the fund. 

It invests in G-Secs (Government of India bonds), state government bonds, corporate bonds or a combination of these bonds, matching the benchmark index. 

You may consider target maturity funds as a relatively safe investment. It puts your money in G-Secs or state government bonds that have a sovereign guarantee. You will find these bonds having no default risk, which makes them a safe investment. Moreover, target maturity funds also invest in AAA-rated bonds of public sector entities that enjoy government backing. 

Should you invest in target maturity funds?

You could invest in target maturity funds if you seek a fixed income investment. It helps if you have a time horizon that matches the maturity date of these funds. For example, you can invest in target maturity funds if you have a time horizon of four to seven years. 

You must invest in target maturity funds only if you can stay with the investment until maturity. Moreover, you get the returns indicated at the time of investing in the fund. It would help if you invested in target maturity funds whose bond yields have risen and stay invested up to maturity. 

Invest in target maturity funds if you seek minimum credit risk as compared to many other debt funds. It puts your money in sovereign government bonds and AAA-rated PSU bonds. 

You may invest in target maturity funds compared to bank fixed deposits if you fall in the higher income tax brackets. After holding the target maturity fund for three or more years, you have long-term capital gains taxed at 20% with the indexation benefit. It is a tax-efficient investment than bank FDs and post office fixed deposits. 

Are target maturity funds the same as FMPs?

You have most fixed maturity plans or FMPs having a maturity period ranging from one to three years. It is a closed-end debt mutual fund scheme with a fixed maturity period. You may invest in FMPs only during the NFO (New Fund Offer) and redeem the investment on maturity. 

You have target maturity funds as open-ended debt mutual fund schemes that offer better liquidity than FMPs. It would invest in bonds that constitute a particular index and have flexible tenure compared to fixed maturity plans. 

What are the disadvantages of investing in target maturity funds?

You will find target maturity funds vulnerable to interest rate fluctuations in the economy. It invests in bonds of longer duration that makes it susceptible to interest rate risk. You may invest in target maturity funds only if you can stay with the investment until maturity. 

You may consider investing in target maturity funds if you are a long-term investor seeking a fixed income investment. Moreover, it has the potential to offer an inflation-beating return over some time. It will help if you invest in these funds to achieve your financial goals based on your risk profile. In a nutshell, you can invest in target maturity funds as an alternative to bank fixed deposits if you are in the higher income tax brackets. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in