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What are the best target maturity debt funds in 2023?

This article gives you the latest view on target maturity debt funds for investors in 2023.

What are the best target maturity debt funds in 2023?


Posted on 01 Feb 2023
Author: Sayan Sircar
5 mins read
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This article gives you the latest view on target maturity debt funds for investors in 2023.

What are the best target maturity debt funds in 2023?

Originally published: 1-Feb-2023

Updated: 16-Apr-2023 - latest funds and YTMs added

📚 Topics covered:

What are target maturity debt funds?

Target maturity debt fund (TMDF) is a debt mutual fund that matures, like an FD, on a particular date. The portfolio of these funds, based on the fund mandate, is a mix of one or more of the following types of bonds:

  • gilt bonds: these are issued by RBI and are for the central government
  • SDL bonds: these are issued by the individual state government to fund various projects and other purposes
  • CPSE and PSU bonds: bonds used by either PSU or CPSE companies

In most cases, the funds are benchmarked against a bond index launched by an index provider like Crisil, NSE or others and are run in a passive fashion. These funds are launched in three formats:

  • ETF tracking the index
  • Fund of fund (FoF) investing in the ETF
  • Index fund tracking the index

Using data from Valueresearchonline and AMC websites, we see that the average maturity of the bonds in the portfolio is very close to the residual time to maturity of the bonds. This is by design since the TMDF buys bonds that mature just before the fund’s maturity date. Therefore, this portfolio structure clarifies the actual yield (measured by Yield To Maturity or YTM minus the expenses TER) the investor is expected to get for every investment made in the fund, given that the bonds are held until maturity.

Related:
Who should invest in target maturity debt funds?

Steps to invest in target maturity debt funds

Determine when you need the money

Using the SMART framework for goal-setting when we need to spend money is one of the essential inputs to the investment process. The output is the goal horizon. For example, suppose you are in January 2023, and the horizon is 5 years. In that case, you need to spend the money in January 2028.

Match the maturity date of the fund with the horizon

Once you know the date, look at the table below and choose a fund that matures just before, say 1-3 months of the goal maturity. In this case, we can see that there is a fund maturing in December 2027.

(click to open in a new tab)
List of Target Maturity Debt Funds in India

How much return to expect?

The Yield To Maturity (YTM) of the fund indicates the expected returns for the investment you are making today. This point is essential. The return will differ if you invest the next month since the YTM changes daily. But for today’s investment, a good predictor of the return over the entire holding period will be:

Adjusted Yield = Yield to Maturity - Fund Expenses

The Adjusted Yield is the last column of the table or can be seen in the chart below:

Target Maturity Debt funds Maturity and Indicative Yields

What else should you check before investing?

Investors should check the suitability profile in the section below. These funds are not FD replacements.

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Suitability for investors

These funds are suitable for investors under certain conditions and investors need to be extremely clear on their requirements and expectations.

A general primer on choosing debt mutual funds is provided here: How to choose a debt mutual fund?.

Who should invest in these funds

Investors should invest if:

  • they know that these funds are not an FD replacement
  • they need the money for a goal immediately after the fund maturity date
  • they intend to hold the fund to maturity. Exiting in the middle may provide unpredictable results
  • they are looking for passively managed debt investments at low cost
  • they understand that the returns can fluctuate even though the bonds do not have credit risk

Who should not invest in these funds

Investors should not invest if:

  • they tend to SIP and forget instead of reviewing and rebalancing: Are your investments on track for your goals?
  • they choose debt funds based on historical returns. The expected returns will depend on the YTM of the portfolio and not what they returned in the past
  • they do not have experience in investing in long-duration bonds and have not witnessed fluctuations due to interest rate fluctuations and liquidity events like March 2020

As per the new tax law change, units purchased in these funds, along with several other categories of non-Indian-equity funds, after 1st-Apr-2023 are no longer eligible for 20%-post-indexation benefit. You can read more here: What should debt, international and gold mutual fund investors do now that these funds are taxable at slab rate?.

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This post titled What are the best target maturity debt funds in 2023? first appeared on 01 Feb 2023 at https://arthgyaan.com


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