In the last six months, the market has witnessed an influx of mutual fund houses announcing launches of target maturity schemes. Many investment advisors are now advising their customers to shift their investments to target maturity schemes offering comparatively higher returns relative to equity mutual funds. Apart, allocating the money to target maturity funds for at least three years allows investors to avail of the benefit of indexation.
The yearning for security has evolved into a fixation on guaranteed return products and fixed return instruments. This explains why many people are rushing to banks and post offices to deposit their earnings.
Why Invest in Target Maturity Funds?
Target maturity fund schemes are ideally open-ended passively managed funds that replicate the underlying debt index with a specific maturity date. These funds have lower interest rate risk and provide more predictable and stable returns, making them ideal for investors who prefer the predictability of returns.
Target maturity fund investments are based on the composition of the underlying index, such as the Nifty SDL or the Nifty PSU bond. These funds are structured similarly to index funds and exchange-traded funds (ETFs), mirroring the index or indices to which they are linked. Investments in the index's constituents are made with the goal of mirroring rather than beating the index's performance.
These funds come with a predetermined maturity date as evident in the scheme name and practice. The primary investment is in bonds with similar maturities constituting the index they track. These bonds are usually held until they mature. On paper, investors will be reimbursed for both principal and interest. However, as with all mutual fund schemes, the principal is not guaranteed, so investors must be aware of this factor before putting their money in them.
On September 27, 2022, Edelweiss Asset Management Limited introduced two new target maturity funds: Edelweiss CRISIL IBX 50:50 Gilt Plus SDL June 2027 Index Fund and Edelweiss CRISIL IBX 50:50 Gilt Plus SDL April 2037 Index Fund.
In October 2022, ICICI Prudential Mutual Fund announced the launch of two target maturity funds, viz., ICICI Prudential Nifty SDL Dec 2028 Index Fund and ICICI Prudential Nifty G-Sec Dec 2030 Index Fund.
Mirae Asset Mutual Fund soon followed by launching two new funds: Mirae Asset CRISIL IBX Gilt Index – April 2033 Index Fund and Mirae Asset Nifty AAA PSU Bond Plus SDL Apr 2026 50:50 Index Fund.
In November 2022, IDFC Mutual Fund House launched two target maturity index funds that will invest in constituents of CRISIL IBX 90:10 SDL Plus Gilt Index (November 2026) and CRISIL IBX 90:10 SDL Plus Gilt Index (April 2032).
Many investors are not aware of the flip side of investing in these funds. One disadvantage is the lack of real performance history and track record. Furthermore, if the fund is not held to maturity, interest rate movements will have a greater impact on your investment. Apart, the concept of the target in these funds limits fund managers' flexibility because investments are limited to specific maturity and/or constituents (within the index constituents).