Target Maturity Funds: A Goal-Based Investment Strategy for the Indian Market

Target Maturity Funds (TMFs) are an innovative investment option that combines the features of both debt and equity investments. They are designed to provide investors with a fixed investment horizon, allowing them to tailor their investments according to their financial goals. 

What are Target Maturity Funds?

Target Maturity Funds are a type of open-ended mutual fund that invests primarily in debt securities with a specific maturity date. These funds aim to provide capital appreciation and income generation over a pre-defined investment horizon.

Investors can choose a TMF based on their desired time frame and financial goals, making it an ideal investment vehicle for those looking to meet specific financial objectives.

Key Features of Target Maturity Funds

1. Defined Investment Horizon: TMFs have a pre-determined investment horizon, typically ranging from 3 to 20 years. This allows investors to plan their investments according to their financial goals and risk appetite.

2. Diversification: TMFs invest in a variety of debt instruments, such as government securities, corporate bonds, and other fixed-income securities. This diversification helps to mitigate risk and enhance the potential for returns.

3. Predictable Returns: TMFs invest in securities that mature around the same time as the fund’s maturity, which provides investors with a degree of predictability in terms of returns. However, it’s important to note that returns are not guaranteed.

4. Indexation Benefits: TMFs are eligible for indexation benefits, which help to reduce the tax liability on capital gains, thereby enhancing post-tax returns.

5. Professional Management: Like other mutual funds, TMFs are managed by professional fund managers who have expertise in debt market investments. They continuously monitor the market and make investment decisions to optimise returns and manage risk.

6. Liquidity: TMFs are open-ended funds, which means that investors can buy and sell units of the fund at any time during the fund’s life.

Benefits of Investing in Target Maturity Funds

1. Goal-Based Investing: TMFs allow investors to align their investments with their financial goals. This helps to create a disciplined investment approach and reduces the likelihood of impulsive investment decisions.

2. Predictable Cash Flows: TMFs provide a predictable stream of cash flows due to the maturity profile of their underlying investments. This makes them suitable for investors who require a regular income or those who wish to plan for specific financial goals.

3. Tax Efficiency: The indexation benefit available for TMFs helps to reduce the tax burden on capital gains, making them more tax-efficient compared to traditional fixed-income instruments.

4. Lower Interest Rate Risk: TMFs invest in debt securities with a defined maturity, which helps to reduce interest rate risk. The fund manager actively manages the portfolio to minimise the impact of interest rate fluctuations on the fund’s performance.

Risks Associated with Target Maturity Funds

1. Credit Risk: TMFs invest in various debt instruments, which carry credit risk. The credit quality of the underlying securities may impact the fund’s returns.

2. Liquidity Risk: Although TMFs are open-ended funds, certain debt securities may have low liquidity, which could impact the fund’s ability to meet redemption requests.

3. Interest Rate Risk: TMFs are not immune to interest rate risk, as the prices of debt securities can fluctuate due to changes in interest rates. However, this risk is lower compared to other debt funds due to the fund manager’s active management of the portfolio.

Examples of Target Maturity Funds in the Indian Market

1. Nippon India ETF Nifty CPSE Bond Plus SDL 2024: This target maturity fund aims to provide returns that closely correspond to the total returns of the Nifty CPSE Bond Plus SDL 2024 Index. The fund primarily invests in debt securities of Central Public Sector Enterprises (CPSEs) and State Development Loans (SDLs) that mature on or before December 2024.

2. Edelweiss Bharat Bond ETF – April 2025: This target maturity fund seeks to provide returns that closely correspond to the total returns of the Nifty Bharat Bond Index – April 2025. The fund invests in AAA-rated bonds issued by public sector enterprises with a target maturity in April 2025.

3. ICICI Prudential Fixed Maturity Plan – Series 87 – 1140 Days Plan B: This close-ended debt fund aims to generate income by investing in a portfolio of fixed-income securities that mature on or before the maturity date of the plan. The investment horizon for this fund is 1140 days from the date of allotment.

4. SBI Debt Fund Series C – 22 (1100 Days): This close-ended debt fund seeks to provide regular income and capital appreciation by investing in a diversified portfolio of debt and money market instruments that mature on or before the maturity date of the scheme. The investment horizon for this fund is 1100 days from the date of allotment.