Of late, there has been a lot of buzz around target maturity funds (TMFs). Several fund houses have come up with these funds, and the AUM of TMFs has swelled considerably in the last one year. If you are wondering what they are and how they can benefit you as a corporate investor, read this blog to find out.
What are Target Maturity Funds?
TMFs are open-ended debt funds with a specific maturity date. These funds, also known as target maturity debt funds and sometimes target maturity bond funds, primarily invest in different types of bonds (Government, PSU, G-Sec).
Target maturity funds are funds that hold on to these bonds until maturity and track an underlying index such as Nifty SDL, Nifty PSU Bond, etc. Upon maturity, you get back the interest and principle. The bond’s maturity date can vary from 6 to 8 years or even more. If the maturity date of the bond changes, the fund’s maturity date also changes. If it happens, you will get a notification.
Benefits of Investing Business Cash in Target Maturity Funds
Investing business cash in target maturity debt funds augurs multiple benefits for you as a corporate investor. Here are some of the major benefits you get by investing company money in them:
- Total Flexibility
Flexibility is an important aspect of any investment. As a business owner you might be in sudden need of liquidity for any unplanned expenses coming your way. Target maturity funds give you total flexibility on when you wish to invest and redeem.
- Lower Risk of Default
Low-quality bonds in portfolios increase the chances of default (credit risk). However, this risk is eliminated considerably in the case of target maturity debt funds as the bonds they invest in are mostly AAA, AA, and A-rated papers. They are comparatively safer than papers rated B, C, and D (see image).
- Less Interest Rate Risk If Held Till Maturity
If you hold target maturity funds till maturity, the impact of an interest rate movement is reduced to a great extent. Note that bond prices and interest rates share an inverse relationship. What it means is that when interest rates go up bond prices fall and vice versa. In a rising interest rate scenario (which is the case at present), if bonds are held till maturity, interest rate risk is mitigated significantly.
However, you must be careful if you withdraw from a target maturity fund before maturity. If you withdraw in a rising interest rate regime, returns from present bonds take a hit. This could lead to losses if you sell.
The Final Word
As evident, investing business cash in target maturity debt funds not As evident, investing business cash in target maturity debt funds not only provides you with a sense of predictability but also reduces credit risk significantly. If you wish to invest in target maturity funds, book a call with our expert at Shootih, India’s First Business Wealth Management Platform, to get going. Happy investing!
Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
