Target Maturity Funds are in the Limelight

With several new fund offers (NFOs) on the anvil, target maturity funds (TMFs) have been gaining traction. Last year, mutual fund (MF) houses newly launched about 40 such TMFs. Today, investors have a choice across different maturities from 2026 to 2037.

Visible returns, high-quality portfolios, attractive yields, low expense ratio and liquidity have been the core reasons for building up attraction for TMFs among investors. 

Similar to debt mutual funds, TMFs invest in a basket of fixed-income securities such as government bonds (G-secs), state development loans, and bonds issued by public sector units (PSUs) and corporates.

However, the key difference is TMFs are passively managed, that is, they track specific fixed-income indices and invest in line with the index.

It was when Edelweiss Asset Management, India’s 13th largest fund house, launched the Bharat Bond Exchange-Traded Fund (ETF) in December 2019, which sparked interest among investors. 

This was India’s first TMF that inspired several other fund houses to introduce their own version of TMFs with a slight difference. 

Essentially, a TMF locks the money at the current yield prevailing in the bond market. Buying bonds at current prices with current (high) yields and then staying invested in them till maturity remains the core idea. Generally, such schemes invest in high-credit quality bonds. 

The fund manager chooses an index that comprises bonds maturing around a similar period. The scheme maturity is matched with the index maturity. An investor is offered a high-quality portfolio with a clearly defined maturity date that ensures that an investor holding the investment gains returns close to the portfolio yield minus the expense of the scheme. 

At the moment, 82 TMFs are available, this includes the various series of Bharat Bond ETFs maturing at different points in time. 

TMFs are taxable at 20% post-indexation when the holding period is more than three years. Therefore, investments in TMFs with a maturity basket of four to 10 years as the yields are considered suitable. 

However, experts feel that investors should not allocate money to a single scheme, all in one go. An ideal strategy would be to invest two-thirds of the money now into schemes that have a maturity of three to five years. The balance could be invested over the next three months as and when interest rates peak. 

Investors should opt for a TMF scheme that suits their holding timeframe. This way, an investor would get an idea of the expected returns while doing away with interest rate risk. The idea is to hold the scheme up to maturity.