Target Maturity Funds are type of debt fund, invests in bonds of defined maturity, have gained in popularity as a higher return safe investment.
While traditional investment avenues offer stable returns, they do not readjust with the changing interest rate scenarios on a real time basis. This is where target maturity funds can be a good fit to an investor’s portfolio.
Target Maturity Fund, consists of the fund’s benchmark index, such as Nifty PSU bond or the Nifty SDL (State Development Loans) Index. These Funds are high in credit quality, but unlike bank fixed deposits, they are not immune to interest rate risk.
Such type of funds, carry lower interest rate risk and provide more predictive and stable returns. These funds have no default risk since the investment is in government securities and highly rated bonds of public sector companies.
Are target maturity funds an alternative to fixed deposits?
You can invest in target maturity funds if you fall in the higher income tax brackets. It is taxed similarly to debt-oriented funds. It makes your investment in target maturity funds tax-efficient as compared to bank fixed deposits.
If you hold investments for as long as 3 years and above it will be taxed at 20% with the indexation benefits.
You may invest in target maturity funds instead of fixed deposits only if it matches your investment objectives and risk tolerance. You may avoid these funds if you cannot hold them until maturity or fall in the lower income tax bracket.
Before investing in a target maturity fund, you must know the disadvantages.
- They don’t have any historical performance to understand its past performance.
- Mutual Funds are open Ended means investor can exit anytime. However, if investors exit before maturity, they could be affected by the interest rate risks.
- This investment is only for those who are looking for not taking lot of risks. Since target maturity funds track an underlying index, fund managers don’t have much scope to adjust the portfolio based on the changes in interest rates or to cash in on high NAV.
You need to understand certain points before investing in Target Maturity Funds.
Currently India’s economy is in the state where there may not be any rate cuts by RBI.
If RBI increases the interest rates further. Then the prices of the existing bonds could go down, and if you exit prematurely, you may incur a loss.
Investors must diversify their holdings in target maturity funds that may be emerging with higher returns.
Target Maturity Funds are ideal for those who want return predictability for a certain period, that is, conservative investors.
