Target maturity funds have gained popularity in recent times because of the style consistency the category offers — a guarantee that the fund will stick to the quality criteria specified in index and predictable maturity as stated. Let us take a close look at target maturity funds and what endears them to investors.

Understanding target maturity funds

These are passively managed funds with, as the name suggests, a target date to mature. Globally, these funds invest in multiple asset classes including equity and are primarily used in long-term financial planning, especially retirement, with a glide path from risky to safe assets as they near maturity dates. In India, however, the current crop of target maturity funds invests only in the debt market. These funds follow a simple methodology at present. The fund house decides a benchmark index to mirror basis its analysis of yield, risk and strategy, and then creates an investment portfolio of the investor’s money basis the underlying allocation of the portfolio/ index.

So, how are these different from the erstwhile fixed maturity plans (FMPs), which were popular and had a similar premise of investing in securities for the duration of the fund and strategy? The answer lies in their structure, which provides ease of liquidity to investors. FMPs are closed ended funds and, despite being listed on stock exchanges, are scarcely traded, thus restricting liquidity. However, target maturity funds are open-ended offered either through ETFs or index funds and their units can be bought or sold any time after their launch and before their maturity.