Target Maturity Funds: What are They and Why Are Becoming Popular? Everything You Need to Know

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Target Maturity Funds

Our hopes that the Indian equity market will not fall as much as the American market have all shattered in mid-May when the Nifty breached its 52-week low on the weekly expiry day. No doubt, equity stocks are performing poorly resulting in losses and negative returns to the investors. The situation is so averse that many retail investors have started looking for options other than the popular ones. The 60:40 ratio is not doing well, the 40 part which has a sacred allocation for debt funds is not sufficing. 

This has given both space and attention to other investment vehicles as well. One such instrument that has been in the news these days is Target Maturity Fund.

The last 12 months have been extremely encouraging for Target Maturity funds as their assets have touched new heights. The increase in investor traffic is a clear indication of the investors’ diversion from the euphoria of high returns to preferring investments that offer stability, in which Target Maturity Funds find their own place. 

Summary in brief

  • Figures confirm the rise in the popularity of target maturity funds
  • Reasons behind the rise in popularity
  • How to invest in the best target maturity funds

Rise In Asset of Target Maturity Funds (TMF)

Let’s first have a glimpse at what target maturity funds are. TMFs are open-ended funds that have a particular maturity date. They are comparable to Fixed Maturity Plans (FMP) except that FMPs are close-ended. TMFs invests mainly in government undertakings, government securities, corporate bonds, and state development loans (SDL). They have passively managed funds that usually invest in assets of an underlying ETF or track it.

Initially, it all started with the launch of the Bharat Bond ETF in December 2019, and became the country’s first TMF. Until Feb 2021, there were no TMFs other than the ETF ones. March 2021 marked the starting of investment in index funds as well, these are the funds that, as said, invest in holdings of an index. 

It was not before the end of 2021 that target maturity funds started gaining momentum. In February 2022, the ratio between ETF and index funds was nearly 3.7 : 1, and just two months later in April, this ratio increased to 1.8: 1. There was around Rs 33.9k crores AUM in index funds in April 2022 as compared to only Rs 18.5k crores in February the same year.

Reasons Behind the Rise in Popularity of TMFs

The most popular target maturity funds have been the ones maturing in 2026 and 2027. There has been a steep rise in the assets of these funds as a large number of investors are showing interest in these funds for short-medium term returns.

Non-performing Equity Assets

The first and foremost reason behind this is the bloodbath in the equity market. Nifty is now at its 52-week low and if the last 12 months' growth is checked, it will be seen that the market has eaten more than 3% of the investors' wealth, leaving aside giving them anything. Moreover, dark clouds have not cleared the sky yet, and the unbearable effects of inflation will hover for some more time on our heads. And probably no one has the idea of how long this ‘some more time’ will be. In such a case, investors are looking forward to parking their money in a scheme that can atleast help them beat inflation. There are already such plans in the market but target maturity funds have an edge over other schemes, which is that they are open-ended.

Heatly Returns ion Short-medium Term

As said, no one is ready to predict how much time will it take for the markets to recover and start a steady run in the upwards direction. So investors are finding nothing wrong if they can put their money in a vehicle that can give an annual return of around 7-9%, which TMFs can render. The maturity of a TMF scheme occurs with the maturity of its holdings (bonds). The holdings, as already explained, are mimicked from an underlying index such as the Nifty PSU Bond Index, Nifty SDL. Once the bonds mature, the investor is paid the principal amount along with interest (in theory).

Stability and Predictability of Returns

After the Franklin Templeton crisis, investors have invested in actively-managed funds with a fair caution. The main concern lies with their credit quality. On the other side, the pooled money in passively-managed TMFs is invested in SDLs bonds, Gsecs, or in a combination of two indices. Also, since the fund matures along with the bonds of the underlying index, there is more predictability of their returns. These two factors- stability and predictability are also the key reasons why investors are looking toward TMFs. 

(Note: TMFs do carry credit default risks, although it is fairly low)

Rising Liquidity

Another reason behind TMFs growing popularity is SEBI’s new regulation for passively-managed funds, which states that transactions below Rs 25 crores cannot be settled with the fund house (or AMC), they instead, have to be routed through the exchanges. This will help in reviving the liquidity of ETFs on the stock exchanges, which until now, has been a major exclamation point for investors.

How to Invest in TMFs?

Investing in TMFs is nothing different than investing in mutual funds and ETFs. Moreover, you do not need to have a Demat account for the same. You can easily invest in the best target maturity funds of 2022 through INDmoney. This will allow you to diversify your investment portfolio and stabilize returns during the market downturns that we are facing now. 

The returns earned from TMFs in short-medium terms can be used along with the primary capital to invest in the equity and other debt instruments when the market will start stabilizing. Until then, you have to protect your capital by making investments in relatively stable and liquid instruments, and TMFs are one such category.