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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?