Here is all you need to know about target maturity funds

While investing in a mutual fund scheme, most investors look to maintain a balance between returns and the risks involved. Debt mutual funds offer stable returns but pose a minimal risk to the investor. An increasingly popular category of debt mutual funds is a target maturity fund that invests in government bonds and holds them until maturity. Read further to know everything about target maturity funds.

What are target maturity funds, and how do they work?

Target maturity funds (TMF) are passive, debt mutual fund schemes that help investors manage their portfolio risk by aligning it with the fund’s maturity date. These funds have a fixed maturity date, and they invest primarily in the bonds of an underlying index that they track.  Their portfolio mainly consists of Public Sector Undertakings (PSUs), state development loans (SDL), and G-secs. Target maturity funds are often seen as an alternative to fixed deposit accounts. They mirror an underlying index by holding its bonds with similar maturity dates and hold these bonds till maturity.

What are the benefits of investing in target maturity funds?

Here are the key benefits of investing in a target maturity fund:

• TMFs are open-ended debt mutual fund schemes: TMF are the types of mutual funds that Investors can redeem their units at any time. However, the fund charges a short or a long-term capital gains tax depending on when the investor withdraws them.
• TMF investments offer indexation benefits to the investor: Target maturity funds are more tax efficient as compared to other debt fund categories. TMF investments offer indexation benefits when the investor holds on to their TMF units for more than three years, thereby qualifying for long-term capital gains.

• TMFs hold funds until maturity: These funds hold their underlying funds until maturity, which offers two distinct benefits to the investor. Firstly, since bonds with different maturities offer different interest rates, the investor benefits from higher returns. Secondly, since the bonds are held until maturity, the impact of increasing and decreasing interest rates is not reflected in the returns offered by these mutual funds.

What are the disadvantages of a TMF investment?

Here are the risks of which investors must be aware:

• Investors cannot know the historical performance of a TMF: Target maturity funds generally do not have a track record or a historical performance that investors can refer to for analysing their previous returns.

• If investors exit early, they can face interest rate risk: Investors who exit a TMF investment early run the risk of facing an interest rate risk.
• These are passively managed funds: TMFs track an underlying index, therefore the fund manager of a TMF cannot make major changes to the portfolio based on the change in interest rates.

Target maturity fund investments are ideal for conservative investors who wish to earn stable, predictable returns for a certain period. Investors who belong in the higher tax bracket can also consider TMFs as an investment option, since they can benefit from 20% indexation in the long run.

Disclaimer: This article is part of sponsored content programme. The Tribune is not responsible for the content including the data in the text and has no role in its selection.