Mutual funds that invest in safe debt instruments and assure investors to give a fixed amount at the time of redemption are known as target maturity funds (TMFs). They are essentially a blend of several bonds which have a similar maturity date.
The target maturity funds are meant for low-risk investors, or as safe allocation in the portfolio of investors with moderate or high risk. For instance, an investor aims for a return of 12 percent per annum from equity allocation, and invests 60 percent there. At the same time, he also parks 15 percent of portfolio in fixed income instruments such as fixed deposits. He also intends to invest the remaining 25 percent of the portfolio in not-so-risky bonds to meet financial goals.
For these funds, he can choose target maturity funds (TMFs) which are safe instruments and promise to give a fixed maturity sum at the end of tenure.
There are several advantages of investing in TMFs. First and foremost, they are as safe as government bonds since investments are made in state development loans (SDL), AAA-rated PSU bonds or government securities.
Another advantage is that there is no interest rate risk, especially if they are held to maturity or for longer than three years. Last, but not the least, these fund units are liquid and can be redeemed prior to their maturity.
Forms of target maturity funds
The target maturity funds (TMF) are debt-centric and can be structured in a couple of ways.
The first one to structure them is to link them to a custom-made index. They are structured to follow a set pattern of debt instruments so that they grow to reach their financial goal.
They can also be structured like exchange traded funds (ETFs). These funds are more liquid than regular funds because they are tradeable in stock markets. To buy them, investors ought to have a trading account and a demat account.
On the face of it, target mutual funds are similar to FMP, but they are considerably different. Unlike TMFs, the FMPs are not liquid, and hence not easy to find their buyers. On the contrary, TMF can be redeemed via AMC or on exchange.
In summary, target mutual funds give assured returns at the end of the fund’s lifetime. However, if your financial goal is to earn substantial gains, then they should not be your ideal choice.