Mutual Funds: What are target maturity funds and why should you invest in them?

Before embarking on your investment journey, aiming to strike the right balance between risk and returns is nothing short of imperative. Higher the risk an investment carries, higher the reward. Vice versa is also true.

In other words, mutual funds which carry lower risk for investors give predictably lower returns. Most of these mutual funds fall in the broader category of debt mutual funds.

If you want a reasonable amount of predictability of returns, target maturity funds — among debt funds — are seen as a good choice. These mutual funds tend to invest in government bonds and hold them till the maturity. During the tenure of these funds, interest income earned from bonds is further reinvested.

What are target maturity funds?

Target maturity funds (TMFs) help investors to manage risks relating to debt mutual funds by aligning their portfolios with the fund’s maturity date. These are passive debt mutual funds which track an underlying bond index.

Portfolio of such funds comprises of bonds that are part of the underlying bond index, and these bonds have maturities hovering around the fund’s stated maturity.

Where do these funds invest?

Investing in these funds is safe and it gives predictable returns because it invests in government securities, PSU bonds and state development loans (SDLs). Therefore, the default risk these funds carry is lower than that of other debt mutual funds.

Why should you invest in them?

There are several reasons for investors to invest in the target maturity funds. First and foremost, they cater to the conservative investors or at least to the debt component of portfolio.

So, the investors who want to take less risk can opt for target maturity funds. Another reason for investors is to stay invested during the fund’s tenure in order to meet financial goals without having to lock their investment.

Unlike fixed maturity plans, target maturity funds are open ended and one can exit them as and when one pleases. This flexibility appeals to a regular retail investor who maintains a healthy portfolio with exposure to both equity and debt.