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
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.
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)
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:
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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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
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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
