Why Target Maturity Funds Make Sense
Target maturity funds (TMFs) are passively managed debt funds launched with a specified maturity date to replicate an underlying index. They buy bonds of similar maturity and hold these to maturity with all interest received during the holding period being reinvested in the fund.
- As per SEBI regulations, TMFs can invest only in high credit quality papers like G-Secs, SDLs and PSU bonds thus mitigating any credit risk
- Unlike FMPs, TMFs are open ended thereby facilitating liquidity for the investors in case of contingencies
- If the TMF investment exceeds three years from the date of investment, the investor stands to benefit from long term capital gains taxation ( 20% with indexation benefit )
- As interest received on the bonds is reinvested in the fund, investors accrue interest regularly and make the most of compounding.
- As TMFs lock yields and continue to roll down the maturity, these make good investment options in times when the interest rates have seen a surge
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