Target Maturity Funds

Target maturity funds are the type of debt mutual fund. With this type of fund, investors can easily navigate interest rate risks. They are passive debt funds that consist of a maturity date. A TMF's portfolio comprises bonds, part of underlying bond indexes. These bonds have a similar maturity to the fund's stated maturity.
Truth be told, TMFs are open-ended debt funds having a specific maturity date. They are similar to FMPs or fixed maturity plans. These open-ended schemes invest in the bonds of underlying indexes that they track. Their portfolio comprises the following:
● Public sector undertakings or PSUs
● State development loans or SDL
● G-secs and other significant bonds
 

Best Target Maturity Funds You Can Invest in 2023

Tabulated below is the list of best target maturity funds that a trader can invest in 2023:

What are Target Maturity funds?

Target maturity funds are passively managed funds. Here, investments get made in the bonds. TMFs, in general, come with a specific maturity period, after which the interest & principal will be paid back to investors.
Simply put, a TMF plan holds bonds and underlying index constituents with similar maturity dates. They will be held until the date of maturity. So, what happens when a bond matures?
TMFs replicate the index that it tracks. So, when a bond matures in the index, it also matures in the fund. When there's a change in the maturity of an underlying index, the maturity date of the fund also changes. This gets notified by the investor. After the maturity date, the scheme's units get redeemed at the NAV applicable on its maturity date.
 

How do target maturity funds work?

So, what is target maturity funds, and how does it work? Considering the SEBI regulations, the TMFs may invest only in the following areas:

● Government Securities (G-Secs)
● State Development Loans (SDLs) and
● PSU bonds mirror the underlying bond index.

The target maturity funds hold bonds in the portfolio until the time of maturity. Then, they roll down the maturities of the bonds. Now, what does rolling down maturity means? Simply put, it means that the duration or maturity of the bond portfolio may reduce over the passage of time.
Let's elucidate it through an example. Suppose you buy a 5-year bond with the aim to hold it until the time of maturity. After a year, the bond becomes a 4-year bond. And after three years, it becomes a 2-year bond, and so on.
It is better known as the yield curve, which generally stays upward-sloping. That implies the longer a maturity, the higher the yield is. So, suppose the yield is of 5 years, so it gets higher than the yield of 4 years.
And suppose you roll down that maturity. Then, it continues to get a higher yield on the portfolio, despite the fact that your portfolio risks reduce as the duration or maturity shortens.
Thus, target maturity mutual funds are a great investment option for traders, especially if the yields or interest rates are high and anticipated to reduce over the years.
In the portfolios of maturity funds, the bonds pay regular interests, i.e., coupons and the face value (principal) on maturity. The coupons that the bonds pay get reinvested in a fund. Thus, traders need to accrue interest & get benefits from compounding
 

Why Should You Invest in Best Target Maturity Funds?

Considering the target maturity fund, bonds are held to maturity. There are no chances of loss if one remains invested for the whole tenure. Note that these funds are open-ended. So, investors can redeem money in case of a default or even a credit downgrade in the security (in portfolios).
Also, target maturity funds offer average returns between 6.8 and 6.9 percent. And one of the most significant choices in India is the bank FDs or Bank fixed deposits (FDs). They are low-risk investments & offer investors a guaranteed return. Since they are liquid, they get easily be withdrawn anytime.
 

Advantages of target maturity funds

TMFs are passive debt mutual fund schemes that track underlying bond indexes. Unlike other open-ended funds, TMFs have defined maturity dates. On the date of maturity, investors hold units of the target maturity funds and get their principal amount alongside accrued interests. These funds might be index funds or exchange-traded funds as well. Narrated below are the key advantages of a target maturity fund:

● Open-ended

They are open-ended schemes, so investors can redeem them anytime. However, you may be subject to capital gains tax (long-term or short-term). That depends on the redemption time.

● Tax-efficient

Another significant perk of TMFs is that they happen to be tax-efficient in comparison to other bond funds. In simple words, TMFs can offer indexation benefits and compute long-term capital gains tax. So, it offers relatively better post-tax returns if you compare it to other bond funds.

● It Can be Held Till It Matures

TMFs can hold funds until the time of maturity. Truth be told, bonds of different maturity periods remain held until maturity. So, the benefits become doubled. First, different maturity bonds provide different interest rates. So, the returns are better than investing in a single bond fund.
Second, interest rates decrease or increase risks are low since bonds are held until maturity. As such, the mark-to-market effect due to changes in the interest rate is not reflected in TMFs.
 

How to invest in Target Maturity Funds using 5paisa App?

As a beginner, you may get confused about investing in target maturity funds on 5paisa App. So, we are here to guide you through. Follow the given steps to invest in TMF with us:
● First, set your investment goals
● Ensure that you select the right fund
● Ask our financial counselor for assistance
At 5paisa, we understand the importance of money and how it needs to be invested in
getting maximum returns. So, we make it possible by bridging the gap between
technology and investments, enabling you to invest at a lower cost. Our team of
educated and well-trained experts can give your comprehensive consultation on target maturity funds. Consult us to learn further about our services.
 

Are Target Maturity Funds a Good Investment?

Yes, target maturity funds are a great investment. It bridges the gap between open-ended debt mutual funds & fixed deposits. It also offers investors visibility of returns & is extremely tax efficient. Returns are better than investing in one bond fund. The increase or decrease in risk of interest rates are low because these bonds are held until maturity. Overall, it's a great investment.

Things we consider to provide ratings for a mutual fund

Mutual funds get rated on the fund's performance over different periods. Its rating depends on the following aspects:
● A fund house's fundamentals are crucial considerations that influence the rating of a mutual fund
● Another crucial aspect to consider while rating a mutual fund is the scheme's asset allocation
● Third, the experience and credentials of the fund manager are critical parameters influencing the mutual fund ratings
● Lastly, returns based on inflation can also be a vital parameter through which we can provide ratings for a mutual fund