As markets move, so do investments. And it appears like India’s investors are joining the trend of target maturity funds as they crossed Rs. 1.2 lakh crore AUM (assets under management) in 2022. Target maturity funds are debt mutual funds that are passively managed and invest in government securities (G-Secs), corporate bonds, and state development loans (SDLs) or a combination of these securities.
Target maturity funds focus on replicating an underlying index, typically tracking the performance of similar maturity bonds that they buy and hold until the specified maturity date. Rather than buying and selling separate bonds, all interest payments received during the holding period are reinvested so that once the scheme matures, investors are provided with the payoff of their initial capital plus any returns gained throughout.
But that’s not all, there are more reasons why target maturity funds are gaining popularity among investors and why you should also add them to your portfolio. Let’s find out.
They don’t require active management or rebalancing by the investor. That means there’s no need for complex decision-making or monitoring your investments on a daily basis, the fund does all of this automatically for you.
Target maturity funds tend to be lower cost than most other mutual funds investment schemes since there are fewer trades involved. This means that more of your money goes into investments rather than fees and commissions.
Flexible investment horizon
The ability to choose from different duration options (such as 5 years, 8 years, or 10 years, etc.) based on how much return they are looking for over time gives investors better control over their investments.
The fund managers decide what assets should be included in your mutual fund portfolio, and how they should be balanced to keep up with the underlying index. This helps reduce risk factors significantly because experienced professionals closely monitor the performance of these funds and make decisions accordingly.
Target maturity funds are open ended, meaning that you can buy or sell them anytime. This offers added flexibility when compared to other investments having a fixed tenure and heavy penalty for premature withdrawal.
Predictability of returns
These types of funds present an opportunity for investors to gain exposure to debt markets with a reasonable degree of predictability of returns. This is because fund managers tend to replicate the underlying debt index, allowing investors to forecast their expected returns. Additionally, since these funds typically invest in higher-quality securities, they help mitigate investment risk and guarantee a certain level of return on investments over time.
The tax treatment of these mutual fund schemes varies depending on the holding period. If the fund is held for up to three years, then it would be categorised as short-term capital gains and taxed according to income tax slab rates. However, if the fund is held for more than three years, then it becomes eligible for long-term capital gain taxation at 20% plus indexation benefits in which purchase price of an investment can be adjusted for inflation over the holding period.
Given its popularity, should you invest in target maturity funds?
These mutual fund schemes are best suited if your investment goals and horizon align with the fund’s maturity date. However, it is crucial to approach these funds with caution. As such, thoroughly analysing factors such as where the scheme will invest, liquidity risks, past performance, fundamental attributes, fees and expenses, and other disclosures is important before investing.
Additionally, seeking the guidance of a financial advisor can prove invaluable in creating an investment strategy that aligns with your risk profile, income, goals, and liabilities, ensuring a well-rounded approach to your financial objectives.