Read on to know the meaning of target maturity funds and if they are a suitable investment option for you
Should we invest in target maturity funds? Which and how many schemes of target maturity funds we should invest in? - Amar Korba
Target maturity funds are passively managed debt funds that come with a specific maturity date. These funds buy and hold similar maturity bonds that are included in the underlying bond index. For instance, if a fund has the maturity year of 2025, it will invest in securities maturing around the same time.
As the maturity date approaches, the maturity rolls down to zero and the fund ceases to exist. Unlike fixed-maturity plans (FMPs) that are closed-end target maturity funds are open-end allowing you to invest or withdraw anytime.
Given their structure, these funds immunise investors against interest rate risk as bonds are held till maturity.
The charm of these funds lies in the predictability of their returns. If investors hold these funds till maturity, they can expect to earn the indicative yields. The yield-to-maturity (YTM) metric indicates the expected return.
So, these funds help an investor to 'lock in' a rate of return. Thus, investing in target maturity funds makes sense when interest rates are at their peak.
Should you invest in these funds?
While the interest rates had been low for quite some time, RBI increased them this year. As the rates have risen, the yields offered by these funds look relatively attractive, making their investment case stronger.
Target maturity funds are ideally suitable for investors who are looking for predictable returns and are willing to invest for a similar horizon as the duration of the fund.
Suggested read: Where can I check the performance of target maturity funds?