In times of volatility, Target Maturity Funds are a great option for investors looking for fixed duration returns within a specific maturity bracket. The recent increase in interest rates by RBI have made this a popular investment option for those looking to add a component of debt to their portfolios.

2022 has seen a continuous patter of market churning news with high inflation, tightening market conditions, and a slowing economy. Long term rates have risen sharply over the last year and there is likelihood of further rate hikes by central banks.

Amidst all the volatility and uncertainty in the macro environment, Target Maturity Funds have gained a lot of popularity over the past few years as a great option for investors looking for fixed duration returns within a specific maturity bracket. In fact, about two dozen new Target Maturity Funds were launched in 2021 alone.

The Reserve Bank of India (RBI) increased interest rates this year, making the investment case for Target Maturity Funds even stronger as the yields promised by such funds seem even more attractive now.

What are Target Maturity Funds?

Target Maturity Funds are open-ended debt funds with a specific maturity date. These funds buy and hold bonds with similar maturity dates as that of the fund itself which are included in the underlying bond index. Such funds generally invest into a combination of government securities, Public Sector Undertaking (PSU) bonds, State Development Loans (SDLs) and AAA rated papers, all of which mature close to the end date of the fund tenure.

The bonds that make up the portfolio are held to maturity and all the payments that are received as interest while the bonds are held are reinvested back into the fund, increasing the spread of investment. Upon maturity, the investors get back their money on a pre-set date and also earn interest on their investment.

The benefits

One of the biggest benefits that they offer is that these are open ended funds. This means that you can enter and exit the fund at any time, giving you complete liquidity over your investment. But, since it is an open-ended fund and there is no binding to stay invested in it till maturity, this can prove to be counterintuitive as you may be tempted to pull out the money beforehand. You must stay invested till maturity to reap the full benefits of an investment in Target Maturity Funds.

The funds offer investors insulation against interest rate fluctuations as they lock in the present day rate of interest for returns till the date of maturity. For the investor, this spells predictability of returns, provided they hold the funds till maturity. You also stand to gain from tax benefits, thereby adding to your overall returns. As against conventional debt instruments, Target Maturity Funds held for a period greater than 3 years are assessed under Capital Gains under long-term capital gains tax, where the benefit of indexation is extended to counter the effect of inflation. This significantly reduces your tax liability and gives higher post tax returns.

The investment can be termed as ‘secure’. As Target Maturity Funds majorly invest into government securities, there is a very low risk of default or of you losing your money. You can check the portfolio in the factsheet of the fund you have shortlisted before investing. As an investor, you also gain from diversification. Each fund holds different bonds that offer varied interest rates and the maturity periods can also be different. This offers you the benefits of minimising your risk due to the diversified portfolio.

What kind of investor are they best suited for?

These funds are well-suited for those who are investing with a specific financial goal in mind and can therefore set aside the funds for a fixed period of time to get predictability for a given period. But, just like for equities, you need to periodically manage and review your debt investments. It is imperative that you invest into Target Maturity Funds based on your risk appetite and also on the interest rate cycle. You should have the capacity to hold on to the investment

Like with any other investment, this investment also requires a deep understanding of debt markets so enable you optimise your returns. Target Maturity Funds offer a low expense ratio since they are passively managed funds.

Disclaimer: An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund

All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (RMF). For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, you may refer the Knowledge Centre section available on the website of Mirae Asset Mutual Fund

Mutual fund investments are subject to market risks, read all scheme related documents carefully.


IE Disclaimer

An investor education initiative by Mirae Asset Mutual Fund.

For information KYC process, Registered Mutual Funds and the procedure to lodge a complaint, refer knowledge centre section available on the website of Mirae Asset Mutal Fund.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.