Target Maturity Funds come with a lot of positives but are they a good investment option for you? What makes them different from other fixed-income instruments. In this video, we tell you everything you need to know about Target Mutual Funds.
Topics Covered:
00:00 INTRODUCTION
00:55 WHAT ARE TARGET MATURITY FUNDS?
05:34 BENEFITS OF TARGET MATURITY FUNDS
07:57 SHORTCOMINGS OF TARGET MATURITY FUNDS
09:11 SHOULD YOU INVEST IN TARGET MATURITY FUNDS?
WHAT ARE TARGET MATURITY FUNDS?
Target maturity funds are debt mutual funds that invest in a portfolio of high quality bonds of a defined maturity. The most obvious part of this definition is the target maturity fund has a specific maturity period that it is targeting which is done by having bonds in the portfolio whose expiry date is very close to the target fund’s maturity.
In addition to having a defined maturity period, target maturity funds generally invest in bonds which have a high credit rating, mostly AAA rated bonds or sovereign bonds i.e. bonds issued or backed by the Government of India. While PSU bonds are quite popular and have been in use in other debt fund categories as well.
Another characteristic of target maturity funds is its passive nature. After all, these funds hold a collection of bonds that are part of the index they track.
BENEFITS OF TARGET MATURITY FUNDS
1. Eligible credit risk – because their holdings comprise mainly of government securities, SDLs, and PSU bonds
2. Low impact on interest rate movements and this happens on account of the hold-unto-maturity strategy also known as the accrual strategy that these funds follow
3. Low costs as target maturity funds generally adopt an ETF or an index fund structure.
4. Tax efficiency offered by target maturity funds which prove super handy when compared to traditional investment avenues like fixed deposits
5. The predictability of returns that investors get for staying invested until the maturity of the fund
Blog:
What is Indexation and How It Helps Reduce Capital Gains Tax On Debt Fund Returns
SHORTCOMINGS OF TARGET MATURITY FUNDS
• Not having a performance history for any of the schemes listed
• Limited room there is for fund managers because the fund’s holdings need securities to be picked from a specific maturity and from within a particular index which can really constrain the universe of available instruments
• If investors don’t hold the fund until maturity .. then in that case, the investment will be affected upwards or downwards by interest rate movements.
SHOULD YOU INVEST IN TARGET MATURITY FUNDS?
If you are a fixed income investor with a medium to long-term horizon you can certainly consider these funds in your portfolio and continue to hold them until their maturity. One needs to look for the fund’s yield to maturity or YTM. The YTM is always listed in the mutual fund company’s monthly factsheet and this number will give you a decent indication of what you can expect from that scheme if held until maturity.
Another related area, we’d like to touch upon here is that the target maturity funds should not be treated as a regular debt fund. If you look at target maturity funds like a fixed deposit or something better than a fixed deposit then it is fine .. you are on the right path and you can lock in the yield and enjoy the returns
But if you are looking at these funds to time the interest rate cycle or take calls on the movement of yields and interest rates then you are probably better off investing in GILT funds rather than target maturity funds
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