What are Target Maturity Funds?
Target Maturity Funds are passively managed funds (either ETF or Index Funds) which aim to hold the underlying bonds of the Index till maturity. One hallmark of TMFs is that they follow a roll down strategy, which means that the average maturity
of the fund falls each year. Unlike other open-ended funds, TMFs have a defined maturity and investors generally get their principal along with interest back after the fund’s maturity. TMFs carry relatively low to moderate credit risk
as they invest in a high quality portfolio comprising government securities, PSU bonds and State Development Loans which enjoy sovereign and quasi-sovereign status. TMFs carry a high interest rate risk though.
Why Invest?
Target Maturity Funds follow a passive strategy and offer liquidity. Investors who are looking at an alternative to FMPs and if their investment horizon matches with the maturity of the fund, can consider these funds. These funds invest in a high quality portfolio of G-secs, PSU bonds and State Development Loans so the credit risk is relatively low to moderate. TMFs can be a part of investor’s core fixed income portfolio.
Are Target Maturity Funds Risky?
Target Maturity Funds are permitted to invest only in G-secs, PSU bonds and State Development Loans that mirror an index. As far as credit risk is concerned, TMFs which solely invest in G-secs have relatively low credit risk. Credit Risk is the
possibility of an issuer failing to make a principal and interest payment when due.
These funds carry a relatively high interest rate risk and a relatively low to moderate credit risk. Interest rate risk is the risk associated with changes in prices of securities such as bonds owing to changes in interest rates. The prices of
debt securities generally rise as interest rates decline and vice versa. The extent of change in price depends on the existing coupon, days to maturity and the extent of increase or decrease in interest rates. The scheme’s risk is indicated
by the Riskometer.
Who should Invest?
Target Maturity Funds are meant both for new and seasoned investors. One should ideally remain invested till the maturity of the fund.
How to Invest?
One can invest in Target Maturity Funds through AMC website, Mutual Fund Distributor, Financial Advisor, MF Utility Platform, or any AMFI or SEBI registered digital investing portal/app holding a RIA/MFD license.
Ideal Investment Horizon
Each fund in this category comes with a different maturity date. For instance, some funds will mature in 2026 while others in 2028. Hence, your investment horizon should ideally match with the fund’s maturity. Since they are open-ended,
TMFs provide you the choice of redeeming before the maturity of the fund.
Tax Benefits
TMFs are structured as debt funds.
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*Short Term Capital Gain Tax: Gains arising out of investments redeemed before 36 months are treated as short term capital gains tax and taxed as per your slab rate.
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*Long Term Capital Gain Tax: Gains arising out of investments redeemed after 36 months are treated as long term capital gains and taxed at 20% with indexation benefit.
* Applicable for investments made till March 31, 2023. Gains arising out of investments made from April 1, 2023, are taxed as per your slab rate. Long term capital gains tax and indexation benefit will no longer be available for such investments.