A reader asks, “I have been reading a bit on Target Maturity Funds and wanted to know if these can be used like a recurring deposit. Example: Let’s say I wish to buy a house in 2031. I want to create a substantial amount for the down payment”.
“I intend to build the corpus through SIP in HDFC Nifty G-Sec July 2031 Index.
I read online that if we hold the amount till maturity, we will approximately get the expected return at the NFO stage (YTM)”.
“So if I start a SIP now and step up as my salary increases, I should be able to accumulate a good sum for the down payment. Unlike equity which may be down just about the same time I plan to purchase”.
“So my question actually, in a nutshell, is if I can use Target Maturity funds for my goals which is a fixed amount in a future time?”
Caveat: With the change in debt mutual fund taxation, it is possible that AMCs may no longer be interested in issuing target maturity funds, or they may issue them bundled in with arbitrage.
🔥Secure your future with our Robo-advisory tool trusted by over 3,500 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
Subscribe for money management solutions via email! (Link takes you to our email sign-up form) Join 32,000+ readers in our community.
👉 New Tool Alert! NaviPlan: A Privacy-Focused Multi-asset Tracker and Goal Planner 👈
For those who wish to know the basics of target maturity funds, we have a detailed FAQ. Here is a snippet.
1 What are Target Maturity Debt Funds? These are open-ended funds investing in various bonds with a specific maturity date. That is, before a given date, the fund manager will sell all the bonds and hold cash. After the maturity date, the cash will be proportionally distributed to unitholders.
In order to facilitate this process, all target maturity funds issued so far are index funds. That is, they track a bond index.
2 What is the benefit of a target maturity date? The NAV of a debt mutual fund fluctuates on a daily basis due to demand vs supply forces in the bond market. This is known as duration risk (or colloquially and incorrectly as interest rate risk). The longer the duration of the bond, the higher the fluctuations.
If a bond fund manager buys and holds 5-year bonds, the NAV fluctuations in the first holding will be highest. It will be lower in the subsequent years. So if the target maturity date is 5Y from now, the fund manager will buy bonds maturing a month or so before the fund maturity date. This will result in NAV growth with progressively decreasing volatility.
3 What return can I expect from these funds if I invest at the NFO stage? The worst mistake a debt fund investor can make is expecting some fixed return! The returns from these funds will depend on two primary factors: (1) Any sudden deviation in demand vs supply in the market (like it happened during the March 2020 market crash) will result in a deviation from the expected yield and actual yield; This is highly probably over the tenure of the fund.
(2) If the credit rating of a bond changes, then such a bond can be replaced by another. (3) Coupon payments will be reinvested at market price. In contrast, the yield to maturity (YTM) assumes the reinvestment is done at the issue price or current price.
These factors will result in a deviation of the actual return from the stated yield to the maturity of the portfolio at the NFO stage. Never forget that target maturity funds are market-linked products, and no return can be guaranteed. If the final return of the fund is close to the NFO YTM, it is more due to luck and not a plan.
Yes, there is a reasonable chance of getting a return close to the NFO YTM for purchases made at NFO. Subsequent purchases (SIP or set-up SIP) are made at market price, and the final return can differ from the initial YTM.
So these are not replacements for recurring deposits. They are less riskier than open-ended debt funds assuming no credit issues. That is about it. With the change in tax rule, they would be marginally more tax efficient than an RD.
Conservative investors or new investors can opt for an RD and sleep peacefully. Target Maturity Funds are only suitable for experienced debt mutual fund investors.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
Use our Robo-advisory Tool to create a complete financial plan! More than 3,000 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), plus non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool helps anyone aged 18 to 80 plan for retirement, plus six non-recurring and four recurring financial goals, with a detailed cash flow summary.
🔥Join our community of 9000+ users! 🔥Avail massive discounts on our courses + freefincal investor circle!
Track your mutual funds and stock investments with our Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds, ETF screeners, as well as momentum and low-volatility stock screeners.
You can follow our articles on Google News
We have over 1,000 videos on YouTube!
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth!
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalised investment advice. We can write a detailed article without mentioning your name if you have a generic question.
About The Author
Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 14 years of experience publishing news analysis, research and financial product development.
Connect with him via Twitter(X) LinkedIn YouTube
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market conditions! Watch the first lecture for free! One-time payment! No recurring fees! Lifelong access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Increase your income by getting people to pay for your skills! More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for side or passive income, we will show you how to do it by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Lifelong access to videos!
Our book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting a side income via content writing. It is available at a 50% discount for Rs. 500 only!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)Connect with us on social media
Our publications
You Can Be Rich Too with Goal-Based Investing
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
Your Ultimate Guide to Travel
