The world of mutual funds is vast and fascinating. It has something to offer to everyone. You have equity funds if you are an aggressive investor with a long-term investment horizon. If you are a conservative looking for capital preservation, you can invest in debt funds. Moreover, if you are a conservative investor looking for passively managed funds, there are options available for you as well. Target maturity funds are mutual debt funds suitable for this kind of investor only. But before we jump to fund suitability and investor type, let's understand what are target maturity funds.
What are Target Maturity Funds?
Target Maturity Debt Funds are one of the types of passively managed debt funds. As the name suggests, these schemes have a specific maturity date. The maturity date represents the lifespan of that particular Scheme which invests In fixed income products like bonds, Government Securities, commercial papers, certificates of deposits (CDs), Treasury Bills Repurchase (TREPS )or other debt securities which come with a maturity date. Post the maturity of that particular fund, the investor is repaid the invested amount with probable returns.
Target maturity funds aim to invest in similar maturity bonds included in the underlying bond index.
Now that you have understood what is target maturity let's know how these funds function.
How do target maturity funds work?
Target maturity debt funds invest in bonds with your money and then hold those bonds till they mature. Target maturity funds are a type of debt scheme that invests in Government Securities, Public Sector Undertaking (PSU) or corporate bonds, and SDLs (State Development Loans).
Low duration Target maturity debt funds have relatively low-interest rate risk. Let's find out how. A bond's interest rate is directly related to the bond's maturity or duration. Meaning the longer the bond maturity, the higher the interest rate risk associated. Let's say you invest in a 5-year bond and wish to hold it till maturity. After one year, the bond's maturity will be four years; hence the interest risk will be lower. After two years, the maturity of the same bond will be three years, and the interest risk will be even lower and so on. As the maturity of target maturity funds rolls down with time, it may help reduce the interest rate risk. Target maturity funds have a predetermined maturity date.
Now that the concept of what is a target maturity fund and its functions are understood, let's look at what are target maturity funds' advantages.
1. Relatively less prone to interest rate risk
As target maturity funds follow an accrual investment strategy (holding security till maturity), the fund's performance is less likely to get impacted by interest rate fluctuation. As mentioned above, the roll-down approach of target maturity schemes can help you mitigate the adverse impact of a rising interest rate scenario on the investment portfolio.
2. Low-cost investment option
Since these funds are passively managed, they carry relatively lower fees for fund management. Target maturity debt funds are either index funds or exchange-traded funds (ETFs); both these types of mutual funds have comparatively lower expense ratios than actively managed mutual funds; therefore, target maturity funds can be considered as a low-cost debt investment option
Difference between Target Maturity Fund and Fixed Maturity Plans
Unlike fixed-maturity plans (FMPs) that are closed-ended, target maturity debt funds are open-ended, allowing you to invest or withdraw anytime during your investment tenure. Therefore, in a time of need, you can easily access/redeem your money invested in target maturity funds, but the same might be difficult in the case of fixed-maturity plans.
How to Invest in Target Maturity Funds?
Investing in target maturity debt funds is straightforward. You can invest in these schemes online if you are a Know Your Customer-compliant investor. You can start investing in it through any mutual fund's website or by contacting a mutual fund distributor.
The bottom line is that target maturity funds are a suitable investment choice if you seek relatively potential returns without taking much risk. Also, if you have a definite investment horizon, you can invest in a target maturity scheme aligned with your goal tenure and maturing around the same time.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
