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What are target maturity funds
Dec 13, 2022
5 min | Views 2134
Financial planning is a critical process which involves everything from goal setting to asset allocation and detailed investment planning. When we establish goals, there are different types from short term nearly immediate goals to the mid-term goals to larger, long-term goals. Matching investment type and timing to each of these goals is a must to ensure the financial road map stays on track.
Criticality of time-specific goals
Amongst these goals, some may be very time-specific. These are the goals for which we have specific fund requirements which would be needed at a specific time. For example, we may be looking at a car upgrade after 3 years for which we know that we will need INR 2 lacs as a down payment. Some goals may be even more critical, for example when we know we will need a sum of INR 5 lacs, 5 years down the line to fund our child’s transition to IB school.
With time specific goals, the fund requirement and timing is known. In fact, it is critical that funds are made available at the right time.
So, is there any investment instrument that can ensure fund availability for these goals in a timely manner?
‘Target maturity funds’ for these time-bound goals!
What is a target maturity fund?
A target maturity fund is a passive debt mutual fund that has a specified and pre-determined maturity date which is in line with the maturity date of the debt instruments it invests in.
Where does it invest?
Target maturity funds generally track a debt index, by investing in the same debt instruments comprised in the index. The debt index is selected based on the desired target maturity of the fund. If for example, the fund’s target maturity is determined to be 30th April 2027, the fund will invest in a combination of debt securities whose maturity date falls in the months leading up to this date. The fund holds these debt investments till maturity.
As per SEBI mandate, target maturity funds can invest in either G-secs, SDLs, or PSU bonds or any combination of them. All of these debt instruments will have a known maturity date as well as a pre-determined attached coupon rate. These instruments also tend to have high credit quality.
Click here to Visit - Index Funds
What are the benefits of these funds for investors?
Complete transparency and predictability
Investors know which debt instruments they are investing in, what are the likely returns they can expect and when the fund will mature.
Amenable to clear financial planning
This transparency and predictability allows investors to clearly plan their goals and align them with their investment in target maturity funds.
Low risks
Most target maturity funds invest in a portfolio of high-quality debt instruments; thus, they tend to have low credit risk.
At the same time, when investments are held till maturity, they have no duration risk. Thus, they alleviate the risks typically associated with debt investments.Retain flexibility
Target maturity funds though have a defined maturity date, are still open-ended. This allows investors to partially or completely redeem their investments even before maturity, in case they require funds.
Low-cost investing strategy
Since target maturity funds are passively managed, they have a considerably lower expense ratio. This makes it a low-cost investing route.
Is accessible to all
Target maturity funds generally have low minimum investment requirement, as low as INR 500 to INR 1000. Thus, most investors can access these funds easily.
Also Read About - What is the Minimum Investment in Mutual Funds?
Are target maturity funds right for you?
At a time when interest rates are peaking and rate-hikes seem to be stabilising, target maturity funds can be a suitable investment choice. This is because it can be an opportune time to invest in such funds to lock-in current high interest rates.
Additionally, if your investing need is time-specific and you are looking for predictability in your fixed income investment, then target maturity funds can be the right choice for you.
Also Read - Fixed Income Mutual Funds: Things to Know before Investing
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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