Target Maturity Fund

An ordinary open-ended debt fund never matures. Its manager keeps buying new bonds as old ones mature, so an investor never knows quite what the portfolio will look like, or earn, by the date they need the money.

A Target Maturity Fund (TMF) fixes that by giving the fund itself a maturity date. It is designed to mature on a specific date, and it invests in bonds with matching maturities. As the date approaches, the bonds mature and the fund returns the money.

Two benefits follow, in the workbook's words: it minimises reinvestment risk, and it provides predictable returns. That makes TMFs, the workbook says, ideal for investors seeking low-risk, income-generating investments with a defined horizon, such as retirement planning or children's education.

And unlike a Fixed Maturity Plan, a TMF gives a way out before maturity: TMFs provide liquidity through listing on stock exchanges, allowing investors to exit early if they need to.

TMF against its nearest relative, the FMP:

The workbook gives two different maturity ranges. Chapter 2 says TMFs mature on a date "typically ranging from 2 to 14 years". Chapter 4 says "typically ranging from 3 to 14 years" — and Chapter 4's own sample question asks for the maturity of a TMF with options including "3 years", "3 to 14 years", "3 to 15 years" and "2 to 10 years". The option that matches is 3 to 14 years, the Chapter 4 figure; but a question built on Chapter 2 could offer 2 to 14.

Why matching maturities reduce risk: if the fund holds bonds maturing close to its own maturity date, it will not have to reinvest large amounts at whatever interest rates prevail later — which is the reinvestment risk the workbook says TMFs minimise. Interest rate movements in between still move the NAV, which is why the predictability applies to investors who stay until maturity.

Suresh, 42, needs about Rs 12 lakh for his daughter's college fees in 7 years. He invests Rs 8,00,000 in a TMF maturing in the same year. Suppose the bonds it holds, bought at launch, offer a yield of about 6 per cent a year to their maturity. Figures are illustrative; the workbook quotes no yields.

Illustrative value at maturity ≈ 8,00,000 × (1.06)^7
                              ≈ 8,00,000 × 1.5036
                              ≈ Rs 12,02,900

Because the fund's bonds mature when he needs the money, he is not exposed to what interest rates will be in year 5 or 6 when an ordinary debt fund would be reinvesting.

Now the other side. In year 3 interest rates rise and the TMF's NAV dips: his holding is marked at Rs 9,10,000 instead of the Rs 9,52,800 the 6 per cent path suggested. If he stays, the bonds still mature at face value and the dip reverses towards the target. If he has to exit early, he can sell on the stock exchange — the TMF is listed — but at a price reflecting that dip.

That is exactly the profile the workbook describes: low-risk, defined horizon, predictable if held to maturity, liquid if not.

Chapter 2, section 2.2, introduces TMFs among "other categories" after FMPs; Chapter 4 (Mutual Fund Products for the New Cadre of Distributors), section 4.6, repeats the description, adds exchange listing, and asks a sample question on TMF maturity. Expect that maturity-range question, a question on what risk TMFs minimise (reinvestment risk), and a comparison with FMPs on liquidity.

• Maturity range: Chapter 4 says 3 to 14 years (and its sample question uses that); Chapter 2 says 2 to 14 years. Read the options for which range is offered.
• TMFs minimise reinvestment risk, not interest rate risk. The NAV still moves with rates before maturity.
• Predictable returns depend on holding to maturity.
• TMFs are listed, allowing exit before maturity — the workbook contrasts this with FMPs, which cannot be redeemed early.
• They invest in bonds with matching maturities.
• Suitable for defined-horizon goals — retirement planning or children's education in the workbook.