TMFs are a relatively new type of fund, and investors are becoming more interested in them. Target Maturity Funds (TMFs), which invest in fixed-income assets, are essentially debt mutual funds. They are open-ended (may take new investments), but they also have a set end date or a closing date that is announced at the time the fund is launched.
TMFs that have been introduced so far are linked to an index, and their fund managers are required to make investments that closely resemble the index it is based on. These funds often invest in securities with maturities that are on or around the closure date since they have a set closing date.
However, there are also regulatory limitations on the types of products they can invest in, among other things.
What are Target Maturity Funds?
Bond investments are typically made through target maturity funds, which are typically passively managed. TMFs have a maturity time, as was previously noted, after which the investors should theoretically receive their principal and interest back. To put it another way, the investments of TMFs are modelled after an underlying index like the Nifty SDL or the Nifty PSU Bond index. So, a specific TMF strategy maintains bonds with comparable maturity dates that are the components of the underlying index and retains them till maturity.
What Makes Target Maturity Funds Unique?
- Return Predictability: Investors who purchase these products with the purpose of keeping them until maturity have a clear understanding of the returns they can anticipate, thanks to the regular publication of the portfolio yield to maturity and expense ratio.
- Capital Safety: Capital safety is indicated to a quasi-sovereign degree because the vast majority of TMFs invest in Central Government Securities, State Development Loans, and PSU Debt Instruments.
- Tax treatment: Because these funds are debt investments with a growth option, fund returns may be reinvested in the fund, and any gain at the conclusion of the investment period will be taxed as capital gains. If the gains are long-term, indexation and a favourable tax slab are both available to them.
- Liquidity: From the standpoint of the investor, these funds may be redeemed whenever the investor pleases.
- Ease of Transaction: Transacting is simple since investors can use tech platforms or their financial advisors to invest and redeem their money.
- Returns: Their fund structure and the fact that their securities are held to maturity provide them with a cost advantage. TMFs invest in government securities, particularly loans from state governments that frequently come with illiquidity premiums. These elements work together to make sure that TMF returns are slightly higher than those of traditional investments and deposits.
Are target maturity funds a good choice for You?
We are in a stage where the risk of rising inflation is increased by the gradual removal of the liquidity support measures, and no additional rate reduction from the RBI is anticipated. Therefore, for depositing a portion of your investment surplus, it is recommended to pick a fund whose maturity substantially corresponds to your investment horizon.
So, these funds might work well if you have a medium- to a long-term goal. Yet, the liquidity in them also carries interest rate concerns; if rates increase, bond prices decline, which also affects a scheme's net asset values. So, only if you can retain them to maturity should you think about target maturity funds.