What Are Target Maturity Funds in Mutual Funds? Benefits & Example

What is the biggest challenge you face when you plan to invest in a mutual fund? Well, the first challenge that you will come across is to select one from the various types of mutual funds. And trust us, this is not an easy task. Every fund category has something to offer. But the choice should be based on your profile and goals.

And in this list of funds, there are target-maturity funds. Falling under the category of debt funds, this is one of the best choices if you are looking to have predictable returns with low risk. But this is just a brief introduction to the target maturity debt funds, and there is more about them.

So, the question is, what are target maturity funds? Well, read this guide to explore all the answers and invest with the right details. 

What Are Target Maturity Funds?

Target maturity funds fall under the category of debt mutual funds. These are designed to mature in a specific year. These funds invest in bonds and debt instruments that all mature around the same time as the fund itself. Because of this structure, the interest rate risk reduces as the maturity date comes closer. For investors, this creates clearer visibility on returns if the investment is held till maturity.

Key Features

• They follow a buy and hold approach till maturity.

• The portfolio mostly includes government securities or PSU bonds.

• NAV fluctuations are less when the fund reaches maturity.

• Returns are more predictable when held till maturity.

• Ideal for goal-based debt investing with a fixed time horizon.

Pros and Cons of Target Maturity Funds

Target maturity funds suit investors who want clarity and discipline in debt investing. But unlike any other investment, there are pros and cons of investing in the target maturity funds. When you know these pros and cons, you will be in a better position to make an investment decision. So, let us now explore the same here.

Pros of Target Maturity Funds

• Predictable returns when held till maturity.

• Lower interest rate risk as maturity approaches.

• Portfolio transparency with defined maturity.

• Mostly invest in government and PSU bonds.

• Cost-efficient compared to traditional debt funds.

• Target maturity fund returns are closer to fixed and less risky.

Cons of Target Maturity Funds

• Limited liquidity before maturity.

• Credit risk exists in PSU or corporate bonds.

• Not suitable for short-term parking.

• Returns may look volatile in early years.

• Best benefits only if held till maturity.

How to Invest in Target Maturity Debt Funds

Investing in target-maturity debt funds is simple. It is quite similar to investing in mutual funds in general. Just the difference is that you would be comparing and contrasting the options from this particular category. So, here are the steps that guide you through how to invest in target maturity debt funds:

• Choose a fund with a maturity year aligned to your goal.

• Invest through a lump sum or SIP via mutual fund platforms.

• Complete KYC and select the growth option for better tax efficiency.

• Hold the investment till maturity for predictable outcomes.

• Avoid frequent entry and exit to reduce volatility impact.

Target Maturity Funds Returns

Target maturity fund returns depend on the yield of underlying bonds and the time left to maturity. While short-term NAV movements can happen, returns become clearer as maturity nears.

• Returns broadly align with the portfolio yield.

• Lower volatility in later years of the fund.

• Better visibility compared to dynamic debt funds.

• Suitable for conservative return expectations.

• Best experienced when held till maturity.

Target Maturity Funds Taxation

Taxation plays an important role in deciding the suitability of target maturity funds. From April 1, 2023, the tax treatment changed for most debt mutual funds. The details of the tax on mutual funds that you must know are as follows:

• Gains are taxed as per the income tax slab rates.

• No long-term capital gains benefit available.

• Indexation benefit is not applicable.

• Tax applies at redemption, not annually.

• Suitable for investors in lower tax brackets.

Who Should Invest in Target Maturity Funds

Target maturity funds are not meant for everyone, but they work very well for investors with clear timelines and predictable needs. If your goal and investment horizon are aligned, these funds can offer stability and visibility.

• Investors with fixed time-bound goals, like education or home purchase.

• Conservative investors who like fixed returns.

• Those shifting from fixed deposits to market-linked debt.

• Investors who can stay invested till maturity.

• Individuals in lower tax brackets are looking for tax efficiency.

Conclusion 

Target maturity debt funds offer a structured way to invest in debt. And all this is offered with better visibility on returns and lower interest rate risk over time. In fact, the target maturity fund's returns are quite predictable, which makes them a great choice for investors.

But remember that you invest in these funds when there is time to maturity. Also, staying invested till the end is a must. This is perfect if you wish to go beyond a fixed deposit and invest better.

If you want help choosing the right target maturity fund based on your goals and tax bracket, explore investment tools and expert insights on Rupeezy and start planning your debt investments with clarity and confidence.

FAQs

Are target maturity funds suitable for first-time investors

Yes, they are easy to understand and suitable for investors with clear time-bound goals.

Can I invest via SIP in target maturity funds

Yes, SIP and lump sum investments are both allowed.

Do target maturity funds carry credit risk

Some credit risk exists, depending on the bonds in the portfolio.

Is holding till maturity compulsory

It is not compulsory, but holding till maturity gives better return visibility.

Are target maturity funds better for tax savings

They are tax-efficient mainly for investors in lower tax brackets.