FAQ: Target Maturity Debt Mutual Funds

Published: February 28, 2022 at 6:00 am

The average retail investor fears debt mutual funds much more than equity funds. Debt mutual funds are harder to choose and the risks are harder to understand (especially when no effort is put in). To tackle these issues, the MF industry has come up with a class of products called Target Maturity Debt Funds. In this FAQ, we discuss what investors should know before considering such funds.

1 What are Target Maturity Debt Funds? These are open-ended funds investing in a variety of 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 of holding will be highest. It will be lower in the subsequent years. So if the target maturity date is say, 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.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    Shown below is the average maturity of Bharat Bond ETF. The average maturity progressively reduces.

    Average Maturity of BHARAT Bond ETF - April 2031
    Average Maturity of BHARAT Bond ETF – April 2031

    The modified duration of the ETF is shown below. This is a measure of supply-demand sensitivity. Higher the value, the higher the NAV volatility. It tends to decrease with time but not smoothly as it depends on market price movements.

    Modified Duration of BHARAT Bond ETF - April 2031
    Modified Duration of BHARAT Bond ETF – April 2031


    3 Do these funds carry credit risk? Yes. So far all target maturity debt funds have restricted themselves to PSU bonds gilts and state development loans. The chances of credit default are low but the credit rating can vary and this can affect the NAV.

    4 What return can I expect from these funds if I invest at the NFO stage? The worse mistake a debt fund investor can do is to expect some fixed return from it! 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.

    These factors will result in a deviation of the actual return from the stated yield to maturity of the portfolio at the NFO stage.

    The yield to maturity of the Bharat Bond ETF is shown below. Notice the fluctuations due to market volatility. The final yield may or may not be close to the initial yield expectation. Therefore it is best that investors do not fixate on a return value.

    Yield to maturity of BHARAT Bond ETF - April 2031
    Yield to maturity of BHARAT Bond ETF – April 2031

    5 If I invest each month in a target maturity fund, will subsequent investments get lower returns? Since the YTM fluctuates month after month, the return of each investment will also fluctuate but unless there is some significant market development, the variation will not be drastic.

    6 When should I choose such funds? Buy them only if the date by which you need money is close to (and after) the target maturity date.

    7 Should I only invest a lump sum at the NFO stage in these funds? You can invest via lump sum and/or systematically in these funds (avoid ETFs for systematic purchase due to price-NAV variations). You don’t need to wait for the next NFO. You can choose an existing fund as long as the target maturity date is convenient.

    8 My need is 15 years away. Can I invest in a 5Y target maturity fund? You can. However, you will need to pay tax upon their maturity which is unnecessary.

    9 Can I invest in these funds if my need is before the target maturity date? Technically, you can since these are open-ended (avoid ETFs due to price-NAV deviations). However, the NAV volatility will be high and the uncertainty of returns will be higher and there is even a possibility of loss. We recommend that you buy (on any date) and hold until maturity.

    10 Can I make a loss if I buy and hold these funds? While it cannot be guaranteed, there is more than a reasonable chance that the final return will be positive if held until maturity.

    11 Where can I find a list of target maturity funds?

    1. Go to Value Research Fund Selector
    2. Select “all debt funds
    3. Download the data in Excel format
    4. Enable data filter
    5. In the fund name column, choose a text filter containing “20” (that is the first two numbers of the maturity year. At the time of writing all funds mature in the same decade. Suitable modifications to include “21” etc. may be necessary in future)

    The results of such a filter are given below

    List of Target Maturity Debt Mutual Funds

    As of Feb 2022, there are 28 such funds including an NFO to be launched next month.

    Fund NameLaunch
    BHARAT Bond ETF – April 20232019-12-26
    BHARAT Bond ETF – April 20302019-12-26
    BHARAT Bond FOF – April 2023 – Direct Plan2019-12-27
    BHARAT Bond FOF – April 2030 – Direct Plan2019-12-27
    BHARAT Bond ETF – April 20252020-07-23
    BHARAT Bond ETF – April 20312020-07-23
    BHARAT Bond FOF – April 2025 – Direct Plan2020-07-24
    BHARAT Bond FOF – April 2031 – Direct Plan2020-07-24
    Nippon India ETF Nifty CPSE Bond Plus SDL – 2024 Maturity2020-11-17
    Edelweiss NIFTY PSU Bond Plus SDL Index Fund – 2026 – Direct Plan2021-03-18
    IDFC Gilt 2027 Index Fund – Direct Plan2021-03-23
    IDFC Gilt 2028 Index Fund – Direct Plan2021-03-23
    Nippon India ETF Nifty SDL – 2026 Maturity2021-03-26
    Axis AAA Bond Plus SDL ETF – 2026 Maturity2021-05-06
    Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 2026 60:40 Index Fund – Direct Plan2021-09-24
    ICICI Prudential PSU Bond Plus SDL 40:60 Index Fund – Sep 2027 – Direct Plan2021-09-28
    Edelweiss NIFTY PSU Bond Plus SDL Index Fund – 2027 – Direct Plan2021-10-11
    Axis AAA Bond Plus SDL ETF – 2026 Maturity FoF – Direct Plan2021-10-20
    BHARAT Bond ETF – April 20322021-12-13
    BHARAT Bond ETF FOF – April 2032 – Direct Plan2021-12-15
    SBI CPSE Bond Plus SDL Sep 2026 50:50 Index Fund – Direct Plan2022-01-24
    Aditya Birla Sun Life Nifty SDL Apr 2027 Index Fund – Direct Plan2022-01-28
    Axis CPSE Plus SDL 2025 70:30 Debt Index Fund – Direct Plan2022-01-28
    Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund – Direct Plan2022-02-11
    Kotak Nifty SDL Apr 2032 Top 12 Equal Weight Index Fund – Direct Plan2022-02-11
    Aditya Birla Sun Life CRISIL AAA Jun 2023 Index Fund – Direct Plan2022-02-22
    Axis CRISIL SDL 2027 Debt Index Fund – Direct Plan2022-02-23
    Edelweiss CRISIL PSU Plus SDL 50:50 Oct 2025 Index Fund – Direct Plan NFO (opens next month)


    Do share this article with your friends using the buttons below.

    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

      Explore the site! Search among our 2000+ articles for information and insight!

      About The Author

      Pattabiraman editor freefincalDr 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 nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
      Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 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 what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
      Our new course!  Increase your income by getting people to pay for your skills! More than 700 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 who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
      Our new book for kids: “Chinchu gets a superpower!” is now available!
      Both boy and girl version covers of Chinchu gets a superpower
      Both boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
      Feedback from a young reader after reading Chinchu gets a Superpower (small version)
      Feedback from a young reader after reading Chinchu gets a Superpower!
      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 for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
      We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
      About freefincal & its content policy Freefincal is a News Media Organization 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 from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (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

      You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
      Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

      Your Ultimate Guide to Travel

      Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)