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Target Maturity Funds
Target maturity funds have gained significant popularity in recent times. So much so that, in FY22-23, the net inflow into Target maturity funds stood at Rs 79,442 crore*.
*Source: moneycontrol.com
You may be curious about the concept of target maturity funds and the reasons behind their recent surge in popularity. So let us delve into knowing more about target maturity funds.
Target maturity funds are passive debt mutual fund schemes that track an underlying debt index. The fund portfolio consists of bonds that are part of the underlying bond index and have maturities close to the fund's stated maturity.
What are Target Maturity Funds?
Target maturity funds are passive debt funds tracking an index of debt instruments. The portfolio strategy of target maturity funds is characterized by passive management and transparency. These funds closely replicate the composition of the underlying index, which primarily includes debt securities of higher credit quality such as Public Sector Undertaking Bonds, State Development Loans, Government Securities, and other bonds.
Unlike other open-ended mutual fund schemes, target maturity debt funds have specific maturity dates. Meaning, the fund manager does not actively buy and sell securities; instead, the securities are held until maturity. Upon maturity, investors holding units of target maturity funds receive the principal amount along with accrued interests.
Target maturity funds assist investors in managing the risks associated with debt funds by aligning their portfolios with the fund's maturity date. They provide some predictability of returns to investors if the investments are held till the maturity of the fund.
Target maturity funds can be in the form of exchange-traded funds or index funds.
Features of Target Maturity Funds
Hybrid funds offer numerous advantages to investors. Here are a few of them:
- Target maturity funds primarily invest in portfolio of debt instruments comprised in the underlying index.
- They provide predictability of returns if the investments are held till the maturity.
- They can be a better alternative to fixed deposits in terms of tax efficiency provided investments are held for more than 3 years.
How to Invest in Target Maturity Funds?
It is very simple and easy to invest in target maturity debt funds with Aditya Birla Sun Life Mutual Fund. All you need to do is:
Register online on the ABSLMF App or website.
Click on the ‘Mutual Fund’ tab and select the ‘Target Maturity Fund’ you wish to invest in.
Click on ‘Invest Now’
Choose the amount and mode of investment (SIP or Lumpsum)
Provide your Know Your Customer (KYC) information, including your PAN number and bank details, to complete your investment process.
Why Should You Invest in Best Target Maturity Funds?
Target maturity funds offer a lot of flexibility to investors. They come with varying investment horizons, aiming to offer attractive yield opportunities at specific times. One can invest in them for short, medium, or long-term goals, depending on their preference. The structure of these funds involves reducing the maturity of the underlying bonds each year. As a result, the duration risk decreases over time, and the fund's returns become more predictable as the defined maturity date approaches.
Since these funds hold debt securities until maturity, the returns from the fund do not get impacted by interest rate movements. Target maturity funds are less prone to interest rate risk due to their strategy of holding bonds until maturity. This approach becomes advantageous in a situation where interest rates are rising since it helps mitigate the potential decrease in investment value. Liquidating these investments before maturity may attract interest rate risk. To maximize returns closer to the Yield to Maturity (YTM), it is essential to hold target maturity funds until their maturity date.
Are Target Maturity Funds a Good Investment?
Absolutely yes! Target maturity funds are ideal, especially in scenarios where the interest rate in the country is unfavourable. These funds reduce the interest rate risk and provide a reasonable predictability of returns. Since these funds carry relatively low risk, they are well-suited for investors who seek predictable returns along with capital preservation.
Target maturity funds replicate the composition of the underlying bond index and invest in bonds that align with the fund's stated maturity. Therefore, they have a greater potential to generate higher growth in comparison to tax-free bonds. Even if you see historical performance, the returns from target maturity funds have always outperformed returns from tax-free bonds. Where tax-free bonds have generated 4.9% to 5% returns, target maturity funds have generated 6.8% to 6.9% returns. They invest in high-quality debt instruments such as Public Sector Undertaking Bonds, State Development Loans, Government Securities, and other bonds which lend relatively higher safety to investors.
Moreover, target maturity funds offer you the flexibility to select funds across different maturity tenures to align with your investment goals.
Note: Aditya Birla Sun Life AMC Limited /Aditya Birla Sun Life Mutual Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments. The document is solely for the information and understanding of intended recipients only.
Frequently Asked Questions
Target maturity funds are passive debt funds that follow an underlying bond index. They maintain a similar portfolio by investing in bonds with comparable maturities. They operate in accrual mode by holding the bonds until maturity and reinvesting any interest received into the fund.
Target maturity funds are suitable for risk-averse investors who seek predictable returns in the medium to long term.
Yes, you can more or less predict returns from target maturity funds. This is because they invest in bonds with a similar maturity thus yielding returns close to Yield to Maturity. However, this is possible only if the investments are held until maturity. If not, the yields may be lower.
Target maturity funds are taxed like debt funds. Pursuant to amendment to the Finance Bill 2023, any capital gains earned on investments made in these scheme on or after 1 April 2023, will be considered as short-term capital gains and added to the investor’s income and taxed at the applicable income tax slab rates (plus any applicable surcharge and cess), regardless of the investment holding period. Please note that investments made on or before March 31, 2023, and held for more than 36 months will be eligible for indexation benefit in taxation. Gains on such investments will be taxed at a rate of 20% (plus applicable surcharge and cess) after taking into account the indexation benefit.
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