If you aim to earn higher returns than offered by the fixed deposits (FDs), and are more concerned about the protection of your investment instead of chasing the much-elusive high returns — then you could contemplate investing in target maturity funds (TMFs).
As per the latest AMFI (Association of Mutual Funds in India) data, there are a total of 146 close-ended mutual schemes with a net AUM (assets under management) as on Jan 31 of ₹30,119 crore. Out of these, 102 are fixed term plans that have a net AUM of ₹20,854 crore as on Jan 31, 2023.
These funds are considered apt for investors who want to achieve a financial goal, particularly in the short or medium term. They offer assured returns to investors and unlike equity mutual funds — they are safer, and are a viable investment option for conservative investors.
What are target maturity funds?
These are debt funds which give a fixed amount of money at the time of maturity. They can either be index funds or exchange-traded funds (ETFs) or the fund of funds (FoFs). When issued via ETFs, they can be traded in the financial markets.
These funds tend to invest in government securities (G-Secs), state development loans (SDLs) and corporate bonds or a combination of these. The fund managers of these mutual funds tend to replicate an underlying debt index.
The credit risk associated to these schemes is low because they invest in sovereign and AAA-rated issuers where the probability of default is almost nil.
Why should you invest in them?
Investors can explore to invest in target maturity funds because of numerous reasons: they are safe, give assured returns and can be easily tracked via debt index.
They are good for conservative investors who want to earn a higher interest that that offered by the term deposits. They are seen as good financial instrument during the rising interest cycle.
Do they offer tax benefits?
To be able to claim tax benefits, debt funds must be held for a minimum of three years. When these funds are redeemed after a period of three years, the capital gains are considered long term and they are taxed at 20 percent, and the indexation benefit is also given.
“From a post-tax return perspective, debt mutual funds score significantly well compared to traditional investment avenues like bank FDs as they enjoy the benefit of indexation making them more tax efficient,” says Farhad Gadiwalla, executive Vice President and Head, Products of UTI Asset Management Company).