Considering target maturity funds? Here is all you need to know

Smart investment move: Are you seeking a reliable investment strategy? Target maturity funds, a type of debt mutual funds, are considered a prudent choice for investors seeking a moderate level of return predictability, say experts. These funds primarily invest in government bonds, holding them until maturity, with the interest income from the bonds being reinvested during the fund's tenure.

Decoding TMFs

Target Maturity Funds (TMFs) emerge as a category of open-ended debt funds, each with a distinct maturity date. "Unlike fixed maturity plans (FMPs), TMFs channel investments into bonds tracking an underlying index, encompassing public sector undertakings (PSUs), state development loans (SDL), G-secs, and other bonds," explained Aastha Gupta, CEO, Share India FinCap.

Experts are eyeing TMFs as an alternative to traditional fixed deposits, given their focus on government securities and predominantly AAA-rated bonds.

Top picks for target maturity funds in 2024

Financial experts recommend a selection of target maturity funds for the year 2024, as curated by 5paisa. Notable among these recommendations is the Kotak Nifty SDL Apr 2027, an Index Fund with a Yield to Maturity (YTM) of 7.7 per cent and a consistent track record. Similarly, the Bandhan CRISIL IBX Gilt April 2028, categorised as an Index Fund, boasts a YTM of 7.54 per cent. Additional options gaining expert approval include the Axis CRISIL IBX SDL May 2027, Edelweiss NIFTY PSU Bond Plus SDL Apr 2026, and Tata Nifty SDL Plus AAA PSU Bond.

"These funds are suggested because of their solid Yield to Maturity (YTM), consistency, and consistent 5-year returns.  When a bond in the index matures, the corresponding bonds in the TMF also mature. Any alterations in the underlying index's maturity trigger changes in the fund's maturity date, with investors receiving timely notifications. On the maturity date, units are automatically redeemed at the prevailing Net Asset Value (NAV), said Gupta.

Advantages of exploring TMFs

Investors stand to benefit from several advantages associated with TMFs, including their open-ended nature, tax efficiency, and the commitment to hold funds until maturity. While the flexibility to redeem anytime exists, investors need to navigate the terrain of capital gains tax. Tax efficiency is a notable feature, offering indexation benefits for computing long-term capital gains tax.

"The strategy of holding funds until maturity helps mitigate risks associated with fluctuating interest rates, ensuring relatively stable returns compared to other bond funds," Gupta added.

Considerations before venturing in

While TMFs come with their share of advantages, prospective investors must be cognisant of certain drawbacks. TMFs lack an extensive historical track record, and premature exits may expose investors to the vagaries of interest rate risks. Additionally, the passive nature of TMFs limits the fund manager's ability to make portfolio adjustments based on market dynamics.

Industry experts posit that TMFs could be particularly appealing to those in higher tax brackets, given the 20 per cent taxation rate on long-term capital gains with indexation.