A target maturity fund is a fund category with a fixed maturity date. As the maturity date gets closer, the maturity value decreases to zero, and the fund ends its existence.
The maturity date of these funds is typically marked in the framework name.
The regularity of target maturity funds' returns distinguishes them. Investors who maintain these funds until maturity hope for returns connected to the indicative yields when invested.
Returns on target maturity debt funds
According to several fund strategists and fund planners, the emergence of bond yields will likely offer the chance for wealthy investors to acquire a 6.5% return in target maturity strategies within the next five years.
They genuinely think investing in a combination of such strategies that mature between 2026 and 2028 will provide investors with superior risk-adjusted returns. Target maturity funds provide investors with a predictable return if held until maturity.
Such schemes have set maturity and engage passively in bonds with related maturities, which serve as the fund's market portfolio and provide visibility of returns.
When the fund matures, investors receive their investment proceeds back. They have occasional liquidity because they are open-ended, and venture capitalists can purchase and sell them at Net Asset Value (NAV).
The expense ratio in direct plans is 15-20 basis points and 30-40% points in regular programs, reducing the cost for venture capitalists.
Investment advisors recommend target maturity funds because speculators have been having difficulties with their fixed-income investment portfolio over the last year, as bond yields have risen by 142 basis points, weakening the rate of return.
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Target maturity funds are more tax-efficient
With increasing and decreasing interest rates on assured financial products, numerous risk-averse speculators, who previously invested in product lines such as financial institution fixed deposits, PPFs, and NSCs, have shifted to debt funds for understandable reasons.
According to these investors, debt funds have become less volatile than general equity funds and much more tax-efficient than fixed deposits, PPFs, and NSCs, with the potential for higher returns.
However, investors are still vulnerable to the risk of default, which is the possibility of losing interest and principal payments, as well as interest rate risk, which is the risk of price volatility due to interest rate changes.
TMFs offer greater liquidity than FMPs
Target maturity funds (TMFs) assist investors in better exploring the risks linked to debt funds by integrating their investment portfolio with the fund's maturity date.
All those are debt funds that passively measure an underpinning bond index. Thereby, such funds' investment strategy consists of bonds that are a component of the total bond portfolio, with maturities that are close to the fund's outlined maturity.
All investment returns obtained during the holding period are invested back in the fund, and the bonds in the investment are retained to maturity.
Target Maturity bond funds, like FMPs (Fixed Maturity Plans), continue operating in an accrual mode. TMFs, unlike FMPs, are open-ended and are available as target-maturity debt index funds. As a result, TMFs provide more liquidity than FMPs.
TMFs have a uniform portfolio in terms of duration because all of the bonds in the fund's portfolio are deemed to be maturing as the stated maturity of the fund.
The fund's duration decreases over time by holding the bonds until maturity, making investors less vulnerable to price volatility induced by shifts in interest rates
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Strong interest in target maturity funds
Investors have shown a strong interest in Target Maturity Funds, with maturities ranging from 2026 to 2027. Financial planners recommend this maturity portion to investors for tax indexation and optimal yields.
These maturities offer yields ranging from 7.48% to 7.55%. Beyond these maturities, such as 2028 and 2029, the market is relatively illiquid.
Passively-managed target maturity funds
The portfolio of passively managed target maturity funds is well-known because it is linked to an index of bonds of investment promotion loans, government securities, or a composite index of the two.
There is also greater return predictability because the fund aims to provide returns closer to the index's yield to maturity if the investor holds the fund until maturity.
Mutual funds have initiated further index-based goal maturity funds, as all ETFs may not generate enough liquidity on stock exchanges, resulting in wider deviations between the executed price and the ETF's intraday NAV (iNav).
The new SEBI regulations for passive funds aim to increase retained until maturity because they provide some predictive ability of return, which is liquidity for ETFs on exchanges by stating that no transaction under Rs 25 crore could be sorted directly with the AMC.
All such transactions must go through exchanges. SEBI also wants to grow the economic ecosystem by rewarding market-makers who will provide liquidity for ETFs.
Target Maturity Funds must ideally be important for investors transitioning from long-established deposit accounts to debt funds.
What are Target Maturity Funds, and how do they work?
Target Maturity Funds, also known as Target Date Funds, are investment funds designed to align with an investor's target retirement date. They automatically adjust their asset allocation over time, becoming more conservative as the target date approaches.
How do Target Maturity Funds choose their investments?
Target Maturity Funds typically invest in a mix of stocks, bonds, and cash equivalents. The asset allocation is determined by the fund manager and adjusts over time to reduce risk as the target date nears.
What's the primary benefit of investing in Target Maturity Funds?
Target Maturity Funds provide a convenient, hands-off approach to investing for retirement. They automatically rebalance to manage risk, making them suitable for investors who prefer a set-and-forget strategy.
Can I invest in a Target Maturity Fund for a different financial goal, not just retirement?
While they're primarily designed for retirement, some investors use them for other financial goals. However, it's essential to understand that the fund's asset allocation will still follow the specified target date strategy.
What happens when a Target Maturity Fund reaches its target date?
When a Target Maturity Fund reaches its target date, it typically becomes more conservative, shifting towards income-generating assets. Investors can choose to redeem their shares or reinvest in a new fund.