What Are Target Maturity Funds? (Meaning, Taxation & How to Invest)

Popular Target Maturity Funds in India

The table below lists some target maturity debt funds available in India. Since yields change with market conditions, the Yield to Maturity (YTM) figures are indicative and may vary over time.

*YTM changes with interest rates and market conditions. It is not a guaranteed return.

What Are Target Maturity Funds?

Target maturity funds are debt mutual funds that invest in bonds maturing around a specific year. Unlike actively managed debt funds, these schemes generally follow a passive investment strategy by tracking a predefined bond index.

The portfolio usually consists of high-credit-quality securities such as Government Securities, State Development Loans, and AAA-rated PSU bonds. As the securities approach maturity, the fund's duration gradually reduces. On the maturity date, the proceeds are distributed according to the scheme's terms or reinvested if applicable.
 

How Do Target Maturity Funds Work?

Target maturity debt funds utilise the roll-down strategy whereby the portfolio manager holds the underlying assets to maturity rather than buying and selling them often. Interest rate risk tends to decline as the time to maturity approaches, meaning that returns are more certain for an investment made until maturity.

Example:

Suppose a target maturity fund invests in Government Securities maturing in 2032. An investor purchases units in 2026 and continues to hold the investment until the fund matures.

During the investment period:

• The fund continues to earn interest from the underlying bonds.
• The portfolio duration gradually decreases as maturity approaches.
• Temporary interest rate movements may affect the NAV, but their impact generally reduces over time.
• If the investor remains invested until maturity, returns are largely influenced by the portfolio yield, expenses, and any tracking difference.
   

Why Should You Invest in Target Maturity Funds?

Target maturity funds may suit investors looking for debt investments with a defined investment horizon. Since these funds invest in high-quality fixed-income securities and follow a passive strategy, they offer greater visibility of the portfolio compared to many actively managed debt funds.

They may be considered for goals such as education planning, retirement planning, or any financial objective with a known timeline. However, returns are linked to market conditions and are not guaranteed.
 

Advantages of Target Maturity Funds

• Defined Investment Horizon: These funds reach their maturity date at a pre-specified period, thus becoming ideal for investment based on goals.  
• Quality Portfolio: Most target maturity funds have high-quality securities like Government Securities, SDLs, and PSU Bonds.
• Passive Investment Strategy: Since the fund tracks a bond index, portfolio changes are generally limited, resulting in a transparent investment approach.
• Decreasing Interest Sensitivity: Duration gets shorter as the bond portfolio approaches its maturity date, resulting in lower sensitivity to changes in interest rates.  
• Diversification of the Portfolio: Investors get access to a range of debt securities via one fund.
   

How to Invest in Target Maturity Funds Using the 5paisa App?

You can invest in target maturity funds through the 5Paisa App by following these steps:

1. Log in to your 5Paisa account using your registered credentials.

2. Go to the Mutual Funds section on the app.

3. Search for the target maturity fund you wish to invest in.

4. Review the scheme details, including its maturity year, investment objective, portfolio, and other available information.

5. Enter the investment amount and choose either a lump sum investment or a SIP, if available.

6. Confirm the transaction and complete the payment through the available banking options.
 

Are Target Maturity Funds a Good Investment?

Target maturity funds may be suitable for investors who have a defined investment horizon and prefer investing in debt instruments with high credit quality. Since these funds generally invest in Government Securities, SDLs, and AAA-rated PSU bonds, they may provide relatively lower credit risk than many other debt fund categories.

However, their returns are linked to interest rate movements, portfolio expenses, and market conditions. Investors should also note that the taxation of target maturity debt funds follows the prevailing income tax rules applicable to debt mutual funds. Before investing, it is important to consider your financial goals, investment horizon, and risk appetite.
 

How to Choose Target Maturity Funds

Selecting a target maturity fund involves evaluating factors specific to debt investments rather than focusing only on past returns.

• Maturity Year: Choose a fund whose maturity aligns with your financial goal or planned investment period.
• Yield to Maturity (YTM): Review the portfolio's YTM to understand the current yield expectation. YTM is indicative and may change with market conditions.
• Portfolio Quality: Check whether the fund primarily invests in Government Securities, State Development Loans, or highly rated PSU bonds.
• Expense Ratio: Compare the expense ratio across similar target maturity funds, as expenses can influence overall returns.
• Tracking Difference: Since these are passive funds, review how closely the scheme has tracked its underlying index over time.
   

Target Maturity Funds vs Fixed Deposits

Conclusion

Target maturity funds may be an appropriate choice for investors looking to invest in high-quality debt instruments having a set investment period. The passive nature of the investment strategy, clarity in the investment portfolio, and pre-set maturity period render it an appropriate choice for goal-oriented investing. Nevertheless, the returns will be tied to the interest rate movement in the market, and the tax treatment will follow the existing norms of debt mutual funds. Before investing in such funds, one needs to compare various factors of the fund.