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.

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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)


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