Unlike traditional debt funds that actively manage interest rate and credit risks, TMFs follow a “buy and hold” approach. They invest in bonds that mature around a specific date, giving investors better visibility on returns if held till maturity.
Kushal Bhagi, Owner of PCC Investing explains, “The portfolio is designed at the start, and it’s important to understand that these bonds are largely held to maturity. So think of it as a buy and hold strategy.”
This approach reduces the impact of interest rate movements over time. While bond prices may fluctuate in the interim, they tend to converge to face value at maturity, helping investors achieve expected yields.
One of the most important aspects of investing in TMFs is aligning your investment horizon with the fund’s maturity.
Vineet Nanda, Managing Director at Sift Capital highlights this point: “It’s important that when you’re investing itself, your financial goal should actually be aligned to the maturity of the fund.”
If investors exit before maturity, returns can be impacted due to changes in interest rates and bond prices. This makes TMFs more suitable for goal-based investing rather than tactical allocation.
Target maturity funds are particularly suitable for conservative and moderate investors who have clearly defined financial goals. Whether it is saving for a planned expense or building a fixed income allocation, these funds provide a structured way to invest with a known timeline.
Bhagi explained that identifying target maturity funds can be slightly tricky, as there is no separate category defined by SEBI specifically for these funds. Instead, investors should view them as a strategy rather than a distinct fund category, embedded within existing mutual fund classifications.
He noted that these funds typically fall under index funds or ETFs, as they track specific bond indices. Investors can identify them through their naming convention, which usually includes details about the underlying assets—such as government securities (G-secs) or PSU bonds—and the maturity year.
For instance, a fund named with a specific maturity year, such as April 2028, indicates that it invests in instruments like state development loans maturing around that time.
On the taxation front, target maturity funds are now taxed at the investor’s marginal income tax rate, similar to other debt instruments. While this has reduced their earlier tax advantage, they still offer a compounding benefit compared to fixed deposits, where interest is taxed annually.
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