The workings of Target Maturity Debt Funds work?

There was a time when young individuals did not think about the future. For Samiksha, who turned 30 this year, retirement and the time ahead had seemed like something very far away – something she would deal with when she reached that stage of her life. However, when her parents retired a few months back, she began questioning her approach. After all, as a private employee, she would not have a pension to base her retirement plan on – she needed to create a corpus that would help her sustain her lifestyle when she no longer wanted to work. And that is when she started researching and came upon the possibility of investing in target maturity debt funds.

How do target maturity debt funds work?

Target maturity debt funds are passive debt funds which invest in high credit assets such as government securities, state development loans and PSU bonds. Since all of these bonds enjoy the backing of the government, they have the ability to offer investors stable returns while posing an extremely low risk, making them one of the best investment options while fleshing out your retirement plan. Further, Samiksha also realised that this was the perfect time to invest in target maturity debt funds, because of the ongoing high interest rate regime. What does that mean? Well, target maturity funds purchase bonds, in line with their maturity dates, and they hold on to these bonds till they mature. For example, if they purchase a 10-year government bond at the current rate of around 7.1%, they will be able to keep receiving 7.3% interest even when the rates drop in the future. Now, for Samiksha, who wants to invest for the long term, this is an excellent opportunity to lock-in high yields while also enjoying optimal security on her investment.  

What happens when TMFs mature?

When your target maturity fund matures, you end up receiving both, the principal amount you invested, as well as the interest accrued over the period of investment. So, if you invest in a target maturity debt fund for 10 years, you will receive your principal, as well as ten years-worth of accumulated interest. Doesn’t that sound like a great way to pad up your retirement corpus? Alternatively, you also have the option of redeeming or selling your units when you need the money, since TMFs are open-ended schemes. If you invest in a TMF which is an index fund, you can redeem your units through the asset management company and, if your target maturity fund falls within the category of exchange traded funds or ETF funds, then you can sell your units in the stock market. This means that your investment is exceptionally liquid while also being safe.

How to choose the best TMF?

The target maturity debt fund is a simple instrument based on a passive investing strategy so you don’t really have to worry about too many aspects while choosing the best fund for yourself. Further, since all TMFs only invest in sovereign or quasi-sovereign bonds, you need not concern yourself with the question of security either. The only thing you should consider, while choosing the best target maturity fund, is the tenure or date of maturity. Since you receive the best returns when you stick with the fund till its maturity date, pick a fund which broadly matches your investment horizon, be it short, medium or long-term. For Samiksha, choosing a long-term target maturity debt fund is the best option since the investment is geared towards creating a retirement corpus which will only be required 20 to 25 years from her date of investment. Another thing you can keep in mind is to ensure that you begin your target maturity fund investments during a high interest rate regime, like the one we are in currently because, otherwise, your yield will be locked into a low coupon environment, which will lead to losses in the future.

Now that you know how target maturity debt funds work, and given the current interest rate scenario, all you have to do is pick a tenure of your liking and start your investment journey. Indeed, TMFs are one easy way to make your long and short term investments both super simple and absolutely safe.

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