Many investors are now exploring mutual funds (MFs) as an alternative to traditional savings instruments like fixed deposits due higher return on investment. The debt funds have become a preferred choice among the risk-averse investors. To cater to the needs of such investors, mutual fund houses have come up with target maturity funds that offer a balance between risk and returns.
The target maturity funds combine the best of traditional savings products and debt funds.
Target Maturity Funds
Target maturity funds are passive debt funds that track an underlying bond index. They are called passive as the fund manager cannot actively rebalance the portfolio of the scheme. Rather, only minor adjustments can be made to keep the fund in line with its underlying bond index.
So, the portfolio of target maturity funds would have only those names that are part of the underlying bond index.
Another distinctive feature of target maturity funds is that they have a predetermined maturity date. This means that if you have invested in a target maturity fund, you will automatically receive your principal amount and the accrued interest at the end of the maturity period.
This happens as all the bonds comprising the target maturity fund’s portfolio mature around the same time as the fund’s predetermined maturity date. The interest payments received during the holding period of these bonds are also reinvested in the fund.
As all the bonds in the fund are held till maturity, the duration of the target maturity fund keeps falling with time. Hence, investors become less prone to price fluctuations caused by interest rate changes, as happens in the case of debt funds, thereby increasing the returns predictability.
Also, target maturity funds are open-ended in nature, which means you can buy/sell units at any time. These funds are offered either as target maturity debt index funds or target maturity bond exchange-traded funds (ETFs).
Another important point to remember is that target maturity funds can currently invest only in government securities, PSU bonds, and state development loans, according to the guidelines issued by the Securities and Exchange Board of India.
Taxation on Target Maturity Funds
Target maturity funds are taxed as debt funds. The taxation law for debt MFs in India was revised for FY24. Any investments made in specified Debt MFs from April 1, 2023, will be subject to taxation at the income tax bracket corresponding to an individual's earnings at the time of redemption.
So if you are ready to make a shift from traditional deposits, it’s time to explore target maturity funds!
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