Is your TMF nearing maturity? Here's what you should know

In the next one year, nearly 15 target-maturity funds (TMFs) and 14 fixed-maturity plans (FMPs) , having a combined asset base of Rs 35,000 crore, are expected to mature. Of these 29 funds, 12 will mature over the next six months.

While TMFs constitute the bulk of this amount, FMPs form a smaller portion - roughly Rs 3,000 crore.

But first, what are TMFs and FMPs?

Target-maturity funds and fixed-maturity plans are debt mutual funds that invest in fixed-income instruments with a set maturity date.

While TMFs are open-ended and track a bond index, FMPs are close-ended and can only be redeemed upon maturity. Though TMFs offer more transparency, both aim to deliver predictable returns if held till maturity.

When these funds mature, the invested amount and any accumulated gains are typically credited to the investors. However, things have been slightly different with some of these funds.

Rather than returning the money to investors, some fund houses are offering merger or rollover options (where fund houses extend a fund's maturity date by reinvesting proceeds from maturing bonds into new securities with a later maturity period).

So far, two fund houses have announced merger plans for TMFs:

• The Bharat Bond ETF April 2025 will be merged with the Bharat Bond ETF April 2030 , effective April 15, 2025.
  
• The Aditya Birla Sun Life CRISIL IBX 60:40 SDL+AAA PSU-Apr 2025 Index Fund will be merged into the Aditya Birla Sun Life Corporate Bond Fund , effective April 30, 2025.

How do you, as an investor, stand to benefit from this move? We find out.

Impact of mergers or rollovers on investors

Merging or rolling over of debt funds can prove to be beneficial for both fund houses and investors. While fund houses get to retain their assets, investors get the advantage of tax efficiency.

Here's how:

• Had you invested in TMFs or FMPs before April 1 2023, your gains will be taxed at 12.5 per cent, if held for over two years. Opting for the merger or rollover at the time of redemption allows you to continue your original date of purchase for taxation purposes.
  
• However, if you redeem the units now and reinvest, the new investment will be taxed as per your tax slab. This is because any debt fund investment made on or after April 1 2023, is taxed as per your income tax slab, irrespective of the holding period.

This variation makes a sizable difference when it comes to taxes. After tax, what you actually take home from your investment is lower than the headline return. In fact, to get the same post-tax return, you'd need to earn about 25 per cent more pre-tax.

For example, if you earn 6 per cent after taxes, you would need to earn 7.5 per cent before taxes to have the same final amount. This is hard to achieve with debt asset classes.

So, should you stay invested or redeem?

If you don't require the money immediately and wish to maintain some debt allocation in your portfolio, it may make sense to continue with the merged or extended scheme while allowing you to enjoy the advantage of tax efficiency.

That said, ensure that the new fund's structure and risk profile align with your financial goals before deciding to stay invested.

Also read: Debt mutual fund with 22% return! Should you invest?