Target maturity funds are investment vehicles that focus on a portfolio of debt instruments such as government bonds, state development loans, PSU bonds, etc., with similar maturity dates. Unlike actively managed funds, target maturity funds are designed to hold the securities until they mature without frequent buying and selling. Investors in these funds receive the principal amount and accrued interest when the securities reach their maturity date.
A specific type of target maturity fund is a target maturity index fund constructed to terminate or conclude at a predetermined date. These funds are structured to align with a particular investment horizon or retirement date. By holding securities until maturity, target maturity funds aim to provide investors with a predictable income stream and the return on their principal investment upon reaching the maturity date.
- Target Maturity Funds Meaning
- Target Maturity Funds Advantages
- Target Maturity Funds Returns
- Target Maturity Funds Taxation
- Target Maturity Funds – Quick Summary
- Frequently Asked Questions
Target Maturity Funds Meaning
Target maturity funds are a type of debt mutual fund that invests in debt instruments that are a part of the index they track. These funds are open-ended schemes with specific maturity periods that align with the investment horizon of different investors. Securities in which the funds invest should have the same characteristics as that of the underlying index in terms of the maturity profile and the type of security.
The fund holds the bonds until maturity, and all the interest payments during the holding tenure are reinvested into the fund. Therefore, target maturity funds operate in accrual mode.
Target maturity funds aim to provide predictable returns to investors by holding bonds until maturity. Target maturity funds are a suitable option, especially during volatile interest rates. This means even if the RBI increases the interest rates in the future, your investments in target maturity funds will be less affected.
These funds are good for investors looking for low-risk investments that protects their capital.
Target Maturity Funds Advantages
One of the key benefits of Target maturity funds is their passive management. These funds just hold onto a group of bonds that match their index instead of actively buying and selling. This means the cost of managing these funds (the expense ratio) is lower.
Target maturity funds are open-ended funds, meaning that investors can redeem their investments anytime. This gives investors flexibility and access to their funds when needed. However, investors should consider the capital gains tax implications when exiting the fund. Also, the credit risk of the funds’ underlying assets is low, making them highly liquid.
A target maturity fund is a better option than other fixed-income instruments.
Investors are unsatisfied with the returns on fixed-income products such as fixed deposits and debt funds because the interest rates offered by these investments are not even giving inflation-beat returns. Also, there is high volatility in the bond yields as it is difficult to predict interest rate cycles. This is where target maturity comes into play, as they are less affected by the volatility in the interest rates.
Negligible credit risk
Target maturity funds are considered low-risk investment options as they primarily invest in government securities, State Development Loans (SDLs), and PSU bonds. These instruments generally have high credit ratings. This makes them a relatively safer investment option than other debt funds.
Target maturity funds are designed to offer predictable returns aligned with the fund’s stated maturity, as they are less affected by interest rate movements. This feature makes them a suitable investment option for investors looking for anticipated returns.
Target maturity funds are useful in protecting investor capital. They invest in debt securities that mature at the same time as the fund’s declared maturity date, with reinvested interest payments. This strategy enhances returns and mitigates potential capital loss.
Capital gains tax earned on TMF is only applicable when the bonds are sold, and they can provide tax-efficient returns, especially if held for more than three years. The returns can be taxed at 20% with indexation benefits.
Target maturity funds offer investors the flexibility to invest in various investment horizons ranging from 1 to 15 years, depending on their investment goals and risk appetite.
Target maturity funds are passive investment options as they track the bond index. This reduces the risk of investment biases and helps investors achieve their goals more consistently.
Reduced interest rate risk
Target maturity funds invest in bonds that mature around the same time as the fund, so the interest rate risk associated with these funds is significantly lower than other bond funds. This means that investors in Target maturity funds are less likely to experience significant losses due to fluctuations in interest rates.
Target maturity funds invest in a bond portfolio, which offers investors diversification benefits. By investing in a range of bonds, investors are less exposed to the risks of any one bond issuer or type of bond.
Target maturity funds are managed by experienced professionals who actively manage the portfolio to ensure that it aligns with the fund’s objectives. The fund manager monitors the market conditions and adjusts the portfolio accordingly to optimize returns for the investors.
Target Maturity Funds Returns
Target maturity funds (TMFs) offer the potential for higher returns ranging from 6.8% to 6.9% compared to traditional tax-free bonds, which offer 4.9% to 5%. However, the returns of Target maturity funds depend on various factors, such as the prevailing interest rates, the credit quality of the underlying bonds, and the fees charged by the fund manager.
Historically, Target maturity funds have offered returns better than other fixed-income investments, such as corporate and municipal bonds. However, it’s important to note that Target maturity funds are not guaranteed investments, and returns can fluctuate based on market conditions.
Target Maturity Funds Taxation
Target maturity funds are taxed similarly to debt mutual funds as they invest majorly in debt instruments. If an investor holds these funds for over three years, the interest earned is taxed at 20% with indexation benefits. Indexation considers inflation during the holding period and adjusts the acquisition cost accordingly to reduce the tax liability.
For holding periods of less than three years, the returns are taxed based on the slab rate of the investor’s taxable income. They are subject to the applicable income tax rate based on the investor’s total income for the financial year. It is important to note that short-term gains from target maturity funds are taxed more than long-term gains.
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Target Maturity Funds – Quick Summary
- Target maturity funds (TMFs) are debt mutual funds that invest in debt instruments with a defined maturity period.
- Target maturity funds invest in high-quality debt instruments such as government bonds, state development loans, and PSU bonds. They have specific maturity periods that align with the investment horizon of different investors.
- The most important advantage of Target maturity funds is that they are passively managed as they hold a collection of bonds that are a part of the index they track. They are suitable for short-term investment and can help investors preserve their capital.
- The returns on target mutual funds can range from 6.8% to 6.9%. However, it depends on various factors, such as prevailing interest rates, the credit quality of underlying bonds, and the maturity period of the fund. Also, they come with higher risk due to the fluctuation in interest rates and credit quality of the underlying bonds.
- If an investor holds target maturity funds for over three years, the interest earned is taxed at 20% with indexation benefits.
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Frequently Asked Questions
1. What is a target maturity fund?
A target maturity fund is a type of investment fund that holds a portfolio of bonds that mature in the same year. The goal of a target maturity fund is to provide a predictable stream of income and return of principal along with interest at the target maturity date.
2. What Is Target Maturity Funds Vs Fd?
Target maturity funds are mutual funds that are designed to mature at a specific date in the future. On the other hand, FDs are a type of savings account that offers a fixed interest rate of interest over a specified period.
3. How Do Target Maturity Bond Funds Work?
The fund manager will select bonds with maturities that match the fund’s target date. As the fund approaches its maturity, it will gradually shift its holdings into shorter-term bonds, such as cash or cash equivalents.
4. Are target maturity funds good?
Target maturity funds can be a good investment option for investors looking for a fixed-income investment with a specific maturity date. These funds offer the flexibility to invest in bonds that mature at specific intervals, which can help investors to match their cash flow needs.
5. Which Is Better, Fmp Or Target Maturity Fund?
If you are looking for a relatively low-risk investment with capital protection and a fixed rate of return, then FMPs can be suitable for you. However, if you are looking for a predictable return and better liquidity, then opting for Target Maturity Funds can be a better option.