What are Target Maturity Funds
Target maturity funds (TMFs) invest in a basket of fixed-income securities such as Government bonds, State Development Loans, and bonds issued by PSUs & high-quality companies. They track a particular fixed income index and invest accordingly. Therefore, they are passively managed funds. For example, the Mirae Asset CRISIL IBX Gilt Index – April 2033 Index Fund is an open-ended target maturity Index Fund investing in the constituents of CRISIL IBX Gilt Index – April 2033. The IDFC CRISIL Gilt 2027 Index Fund is a target maturity fund that tracks the CRISIL Gilt 2027 Index.
Features of a target maturity fund
- A TMF has a specified maturity date aligned with the expiry date of the bonds present in its portfolio. The bonds are held till maturity. Investment is made primarily in G-Secs, State Development Loans, and AAA-rated PSU bonds.
- The fund’s returns are protected from the impact of rising interest rate scenarios where bond prices decrease in value as bonds are held until maturity.
- Reinvestment of interest earned by the fund may be allocated to new investments. This can result in changes in the expected returns.
- It is an open-ended product. There is no lock-in which means investors can redeem their investments at any time. Exit before maturity can lead to returns differing from the original yields depending on the interest rates at the time of redemption which can lead to changes in the bond prices
How are they different from other fixed income products?
| Features | Target Maturity Bonds | Fixed Deposits | Debt Funds | Fixed Maturity Plants |
| Liquidity | Highly liquid | Illiquid | Highly liquid | Relatively illiquid |
| Diversification | Investment in fixed-income securities based on the underlying index | NA | Investments in various debt instruments | Investments in various debt instruments |
| Entry point | Invest at any time by purchasing in the market | Open an FD account at any time | Invest at any time by purchasing in the market or via NFOs | Invest when the NFO time window is open. |
| Taxation | Long-term capital gains tax with indexation benefits or short-term gains tax based on exit. | Taxed as per income tax slab | Depends on redemption | Depends on maturity period |
What are the tax implications of investing in target maturity funds
Profits on TMFs kept for a duration longer than three years would be considered long-term capital gains with the benefit of indexation extended, else short-term gains tax is applicable..
Does it make sense to invest in target maturity funds?
TMFs are flexible investment avenues with no restrictions on buying and selling. They are passive funds, and therefore the expense ratio is low. The credit risk is lower as investments are typically made in quality debt instruments. They are more tax efficient compared to some of the other investment options. But these funds have just been launched. Therefore, there is no record of performance. If you want to exit the investment before the maturity date, you might be affected by interest rate movements. Since they are based on an underlying index, fund managers have limited scope to maximize returns.
It may be a suitable investment if you are a conservative investor and the maturity of the fund you are considering is aligned with your investment horizon or if you are looking for a low-risk investment with relatively fixed returns. It might be useful for goals that are in the near future, and capital preservation is more important than returns maximization. If you want to avoid interest rate risks, you can stagger the investment amount in different target maturity funds with varying maturity dates.
Before investing, do ensure that your investments are aligned with your targeted asset allocation mix, risk profile, and financial situation.
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