Four reasons why you should lock in returns with target maturity funds

Topics funds | Investors | Investment

Target maturity funds (TMFs) are gaining popularity. Currently, the new fund offer (NFO) of ICICI Prudential PSU Bond Plus SDL 40:60 Index Fund-September 2027 is on. The NFO of Aditya Birla Sun Life Nifty SDL Plus PSU Bond September 2026 60:40 Index Fund closed on September 23. Edelweiss Mutual Fund (MF), Nippon India MF, and IDFC MF are other fund houses that have launched TMFs in the past. Avoid interest-rate risk These are hold-to-maturity funds. Their corpus gets invested in an index that matures on a particular date. “By investing in this fund, investors can lock i.....
Target maturity funds (TMFs) are gaining popularity. Currently, the new fund offer (NFO) of ICICI Prudential PSU Bond Plus SDL 40:60 Index Fund-September 2027 is on. The NFO of Aditya Birla Sun Life Nifty SDL Plus PSU Bond September 2026 60:40 Index Fund closed on September 23. Edelweiss Mutual Fund (MF), Nippon India MF, and IDFC MF are other fund houses that have launched TMFs in the past.

Avoid interest-rate risk

These are hold-to-maturity funds. Their corpus gets invested in an index that matures on a particular date.

“By investing in this fund, investors can lock in the yield they will receive on maturity,” says Chintan Haria, head-product development and strategy, ICICI Prudential MF.

Most experts expect interest rates to harden in the near future. The net asset values (NAVs) of debt funds, especially those with a higher duration, take a knock in such a scenario. 

“These funds allow the investor to negate the impact of rising interest rates if they are held to maturity,” says Joydeep Sen, corporate trainer and author.

These funds are transparent. Investors can view the index constituents and know where their money will be invested. They are also low on credit risk.

“Our fund will invest in a high-quality portfolio consisting of eight AAA-rated public sector undertaking (PSU) bonds and 20 state development loans (SDLs) — all government-backed instruments,” says Haria.

These passive funds have a low expense ratio.

“This is important in a low-interest rate environment,” says Vishal Dhawan, chief financial planner, PlanAhead Wealth Advisors.

Yields from five-year SDLs and AAA-rated PSU bonds are in the range of 5.9-6.2 per cent currently.

Better option than FMPs

Earlier, investors would invest in a fixed maturity plan (FMP) to lock in returns. Experts like Sen expect TMFs to surpass FMPs in popularity over time.

“FMPs are listed on the exchanges, but they suffer from low liquidity. Since these are open-end index funds, investors can buy or sell their units to the fund house at any time at NAV,” he says.

Some TMFs are in the exchange-traded fund format. They also trade on the exchanges. In listed products, if liquidity is low, the price can deviate from NAV. 

FMPs are usually issued for a tenure of up to three years. TMFs are available for longer tenures as well.

Locking in at low rates

We are currently in a low interest-rate scenario.

“If you invest in these funds for the long term, you will do so at lower rates,” says Dhawan.

Those who invest in a shorter-duration debt fund now will benefit from rising rates, as their corpus would get reinvested at shorter intervals into bonds offering higher coupons.

Interest rates tend to be cyclical. They may head upwards in the near future, but will fall again eventually. In such a scenario, debt funds, especially those with a longer duration, will register high capital gains.

“Investors who wish to gain from a decline in interest rates will be deprived of that benefit if they hold these funds till maturity,” says Sen.

Liquidity is available, so investors do have the option to register mark-to-market gains.

Match fund with investment horizon

These funds are suited to investors whose investment horizon matches the tenure of these funds.  

Investors making the shift from fixed deposits (FDs) to debt funds may use them to get a targeted rate of return. Due to the more favourable tax treatment of debt funds with tenure beyond three years (20 per cent with indexation), their post-tax returns are likely to be higher than from FDs of top banks.

Investors with shorter investment tenure should avoid these funds.

“If an investor exits midway, his returns could be lower than he expected at entry,” says Dhawan.

Many variations of TMFs have become available: PSU bonds only, PSU bonds plus SDLs, gilts only, and so on. 

“Select a fund whose tenure matches your investment horizon. And go for the one with a lower expense ratio,” says Arnav Pandya, founder, Moneyeduschool.

Ready Reckoner

Where target maturity funds score...

  • High credit quality
  • Duration risk circumvented if held to maturity
  • Open-end index fund format, so liquidity available at NAV from fund house

...and where they don’t

  • Returns lower than in higher-risk categories (like credit risk funds)
  • No benefit of reinvestment at higher coupons (as in shorter-duration funds), or of high capital gains (in longer-duration funds), if these funds are held to maturity   



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