All You Need to Know about Target Maturity Funds

In recent years, there has been a lot of buzz around Target Maturity Funds (TMFs) in the mutual fund industry. According to a media report, over 10-12 new debt schemes (TMFs) were launched in 2021. Examples of a few launched TMFs are SBI MF launched CPSE Bond Plus SDL Sep 2026 50:50 Index Fund and Axis MF launched CPSE Plus SDL 2025 70:30 Debt Index Fund. 

TMFs are essentially open-ended debt funds with a specific maturity date. While similar to fixed maturity plans (FMPs), TMFs are open-ended schemes. They mainly invest in bonds of an underlying index it tracks. The portfolio primarily consists of public sector undertakings (PSUs), state development loans (SDL), G-secs, and other bonds.

Investors could look to target maturity funds (TMFs) as an alternative for bank fixed deposits, considering TMF investments are made in Government securities and other bonds (mostly AAA bonds).

But investors should understand about TMFs before investing, irrespective of the fixed returns.

Here is what you as an investor should know about TMFs.

What are TMFs?

Target maturity funds are usually passively managed, where investments are made in bonds. As mentioned earlier, TMFs come with a maturity period, post which (in theory), interest and principal are paid back to the investors. In other words, TMFs investments mirror an underlying index such as Nifty SDL or the Nifty PSU Bond index. So, a particular TMF plan holds bonds that are the underlying index’s constituents with similar maturity dates and are held till maturity.

Let’s understand better with an example

SBI MF launched the TMF plan in January this year. It is the SBI CPSE Bond Plus SDL Sep 2026 50:50 Index Fund. The fund invests in bonds maturing in 4 to 7 years. This fund’s benchmark is the Nifty CPSE Bond Plus SDL Sep 2026 50:50 Index.

You might be wondering what happens when a bond matures? Considering TMFs replicate the index it tracks if a bond matures in the index, the bonds mature in the fund. If there is a change in the underlying index’s maturity, the fund’s maturity date will also change. And investors will be notified of the same. Upon the maturity date, the units of the scheme will be automatically redeemed at the applicable NAV on the maturity date. 

Benefits of Target Maturity Funds

A few key advantages of investing in target maturity funds in India are as follows:

• Open-ended

TMFs are mostly open-ended schemes. It means you, as an investor, get to redeem it anytime. But keep in mind you would be subject to capital gains tax – short-term or long-term, depending on the time of redemption.

• Tax-efficient

One of the key benefits to note about TMFs is that they are tax-efficient compared to other bond funds. TMFs provide indexation benefits while computing long-term capital gains tax. This, therefore, offers relatively better post-tax returns when compared to other bond funds.

• Held Until Maturity

TMFs hold funds until maturity. So, since bonds of varying maturity periods are held till maturity, the benefits are twofold.

One, different maturity bonds offer different interest rates, and therefore your returns are slightly better than investing in one bond fund.

Two, the interest rate increase/decrease risks are low because bonds are held till maturity. And as such, the mark-to-market impact due to changes in interest rates is not reflected in target date funds.

Downside of Investing in TMFs

Before investing in a target maturity fund, there are a few disadvantages to note. They are as follows:

• Less Historical Track Record

While the TMFs funds offer relatively better returns than other bond funds, TMFs don’t have any track record or historical performance to understand its past returns.

• Risk on Early Exit

MFs are open-ended. This means investors can exit anytime. However, if investors exit before maturity, they could be affected by the interest rate risks. Let’s understand this with an example.

For instance, a TMF plan matures in 2026, and you exit before 2026. If the economy is in an increasing interest rate trend, then the prices of the current bonds may fall. This is because there could be new bonds issued by the Government with higher interest rates. You may sell it for a loss.

Similarly, if we are at decreasing interest rates trend, and RBI announces a rate cut, then the existing bond prices may go up. So if you exit early, you may miss out on this. 

• Passive

This is not essentially a downside for all. If you are looking to mirror index returns and not take on a lot of risks, a passive investment strategy may work for you.

Since TMFs 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.

An Investment Opportunity?

Before considering an investment into a target maturity fund investment, keep in mind a few points.

The economy is in a state where there may not be any rate cuts from RBI. Therefore, the rate hike chances are expected in the next few months, if not immediately.

So, the prices of existing bonds could go down, and if you exit prematurely, you may incur a loss.

• Investors could diversify their holdings in TMFs that may be emerging with higher returns.
  
  
• TMFs are ideal for those investors who want return predictability for a certain period, that is, conservative investors.
  
  
•  According to many experts, TMFs could be considered for those in the higher tax bracket, as long-term capital gains are taxed at 20% with indexation.