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How target maturity debt funds may be the closest alternatives to fixed deposits

These open-ended schemes have a high-quality portfolio of bonds issued by central and state governments.

July 01, 2021 / 10:01 AM IST

Target maturity debt funds are structured like any other bond schemes, but they come with a specified maturity date. This date is in accordance with the maturity profile of the bonds held in the portfolio. The idea is to have a simple debt portfolio with a predictable yield to maturity. If you invest at the time of the scheme’s launch, you can potentially get a yield equal to the portfolio yield (less scheme expenses) at maturity.

Thus, if you hold the scheme till maturity, you can avoid all interest rate risk. Typically, the maturity year will be built into the name of the scheme so that you know the time frame you are looking at. These are open-ended schemes, which means you can buy and sell units at any time.

Another unique aspect about these schemes is that they are passive in nature and hence have a simple portfolio with no fund manager risk. At present, the target maturity schemes available are those that invest in either State or Central Government bonds. So, credit risk is low.

Why should you invest?

In line with the low-risk nature of these portfolios, the return is also relatively low. Target maturity funds can potentially offer:


-Stable returns

-Flexibility in transaction

-Alignment of goal with maturity

-High quality portfolio

-Efficient taxation

If you have a good sense of when you will need the money, how much you need and want to keep the risk at a minimum, these funds can be helpful. A down-payment for a house or the funds required for an international vacation a few years down the line, for example. For such goals, target maturity funds can work well.

Since debt fund gains are taxed at 20 percent with indexation benefit, if held for more than three years, these schemes work better than fixed deposits for those in the higher tax slabs.

The passive nature of the schemes removes any fund manager risk where allocation is long-term in nature. If you don’t know which fund manager to trust with your high priority investment, it is best to stick to a portfolio of bonds issued by government-owned or backed companies, which is what these schemes offer.

What’s available?

The target maturity debt fund basket is still sparsely populated, but there is enough choice for you to begin with. You may not be able to craft and entire debt allocation with these. However, for those financial objectives where you can’t compromise quality and stability of return, pick from the below options.

-Edelweiss Nifty PSU Bond Plus SDL Index – 2026

-Nippon India ETF Nifty SDL – 2026

-Nippon India ETF CPSE Bond Plus SDL – 2024

-Axis AAA Bond Plus SDL ETF – 2026

-IDFC Gilt Index Fund - 2027

-IDFC Gilt Index Fund - 2028

-Edelweiss Bharat Bond (ETF and FoF) – 2023

-Edelweiss Bharat Bond (ETF and FoF) – 2025

-Edelweiss Bharat Bond (ETF and FoF) – 2030

-Edelweiss Bharat Bond (ETF and FoF) – 2031

The expected yield is 6 percent a year for the Nifty SDL 2026 underlying index funds. Keep in mind that some of these are exchange traded funds, which means you will need a demat account to invest in them.

What’s the risk?

A passive portfolio can be a double-edged sword. Returns can fall short if the interest rate cycle reverses during your investment horizon. In an actively managed scheme, the fund manager will change the strategy and portfolio to accommodate higher coupon bonds as the cycle turns, but this will not play out for target maturity schemes. You will have to be satisfied with lower-than-market return in some situations and interest rate cycles.

These are open-ended schemes, and so there will be a tracking error, which results in slightly lower returns as compared to the scheme’s benchmark. Unlike the fund itself, its underlying index does not have to deal with fresh investments on a daily basis.

Also, you must note that these are new structures. So, there is no long track record to go by.

Risks notwithstanding, a target maturity debt fund with a high-quality portfolio of bonds issued by central/state governments is perhaps the closest alternative to a fixed deposit. If you prefer, start with a small investment to understand the nuances. You can increase allocations later.
Lisa Barbora is a freelance writer. Views are personal.
first published: Jul 1, 2021 09:48 am
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