The success of Bharat Bond Exchange Traded Fund (ETF) has induced heightened interest in passively managed debt schemes. SBI Mutual Fund (MF) recently rolled out the CPSE Bond Plus SDL Sep 2026 Fund. Axis MF has also launched CPSE Bond Plus SDL Fund April 2025 Fund. Both are index funds. At present, there are 13 target maturity funds that manage around Rs 50,000 crore of investor assets, cumulatively. Edelweiss MF was the first fund house to launch a target maturity ETF – Bharat Bond ETF (BBETF) – and, since then, several fund houses have been launching such schemes. All the five BBETFs put together (all of different maturities) have combined assets of over Rs 40,000 crore, which is the largest in this space.
What do they offer?
Debt scheme investors usually look for return predictability, and this is what these passive bond funds aim to offer. As you would have noted, the names of these funds mention a year and month. This is nothing but the point at which all the securities held by the fund will mature. The fund will cease to exist and return all monies to investors.
These funds may give some predictability in returns to investors as they hold the debt securities till their maturities. However, investors should stay put till the target maturity to get the fund’s yield.
As these are passive schemes, they invest in a preset index of companies and aim to track the returns of the underlying index.
Tax-efficient returns
If you think you can stay invested beyond three years, target-maturity funds, like any other debt fund, can give you better tax-efficient returns that a traditional fixed deposit. After three years, you are taxed at 20 percent on long-term capital gains with indexation benefit, whereas the gains from an FD are taxed at your income tax slab rate. So, for those at higher tax slabs, such funds can be more tax-efficient.
Also, unlike FMPs, target-maturity funds are open-ended. So, you can exit before maturity, but then you run the risk of getting lower-than-expected returns in a rising interest rate scenario.
How liquid are these funds?
Debt markets in India are illiquid. But these funds usually invest in securities that are comparatively lot more liquid such as securities (G-Secs), state development loans and PSU bonds.
If you look to sell your target maturity ETF on the exchange before the maturity, the price differential from its NAV (real-time NAV issued by mutual funds) may be higher if your fund trades with low volumes on the exchanges and there are not enough buy-sell quotes generated by market makers.
However, with index funds, you are directly dealing with the fund house, so you can at least withdraw your investments at the fund’s NAV declared at the end of the day. But remember, if you withdraw before maturity, you will have to absorb the impact of interest rate spikes even in index funds.
“Large-sized debt ETFs like Bharat Bond ETF have decent liquidity on exchange and as more retail investors invest, it will improve further. Debt Index funds are also good for most retail investors as they don't have to depend on exchange volumes for liquidity and they can directly invest or withdraw investments from the asset management company, without much impact cost,” says Niranjan Avasthi, head-product and marketing, Edelweiss MF.
How to select target maturity funds
Mutual funds offer different type of target maturity funds with different investment mandates. Some of these funds only invest in g-secs, some in a combination of SDLs and g-secs or SDL and PSU bonds in different proportions. The ones offered with g-secs are considered to have the highest credit safety, but SDLs (issued by state governments) and PSU bonds (issued by government-owned companies) are also seen as quasi-sovereign debt papers. However, yields are likely to be higher on SDLs and PSU bonds.
So, look for a fund that suits your risk tolerance and return expectations. Also, opt for the fund whose target maturity suits the time-horizon of your financial goal. Speak to your financial advisor to get a sense of some sort of indicative return from your fund.
If you are sure that you are going to be holding the fund till its maturity, then you don’t have to worry about interest-rate risk.
Why not regular open-ended debt schemes?
You can also use regular open-end debt schemes for your investment goals, but then these funds maintain a certain duration risk constantly.
For example, a short-term will constantly maintain the portfolio duration between two and three years
Whereas a target maturity fund, rolls-down the maturity. So, as you come closer to your goal, there is only the residual maturity left on your investments. Remember, lower the maturity the less sensitive are your bond investments to interest rate fluctuations.
So, if you withdraw closer to the maturity, you are likely to get returns that are closer to the indicative yield than if you withdrew early on.
Bond laddering
Target maturity funds could help you to mitigate impact of another risk – the reinvestment risk. To do this, you need to invest in a combination of target maturity funds.
You can stagger your investments in funds maturing in different periods. So, you invest some funds in 6-month instruments, some in one-year securities, some in 18-month bonds and so on. This ensures that bonds mature over multiple time spans and you can immediately reinvest the same at prevailing interest rates.
This is all the more relevant in current times when interest rates are expected to rise. To make sure that you get as high an interest rate as possible, you devise a laddering strategy across the maturity curve.
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