Monday, May 1, 2023
HomeMutual FundCan I use Target Maturity Funds like recurring deposits?

Can I use Target Maturity Funds like recurring deposits?


A reader asks, “I have been reading a bit on Target Maturity Funds and wanted to know if these can be used like a recurring deposit. Example: Let’s say I wish to buy a house in 2031. I want to create a substantial amount for the down payment”.

“I intend to build the corpus through SIP in HDFC Nifty G-Sec July 2031 Index.
I read online that if we hold the amount till maturity, we will approximately get the expected return at the NFO stage (YTM)”.

“So if I start a SIP now and step up as my salary increases, I should be able to accumulate a good sum for the down payment. Unlike equity which may be down just about the same time I plan to purchase”.

“So my question actually, in a nutshell, is if I can use Target Maturity funds for my goals which is a fixed amount in a future time?”

Caveat: With the change in debt mutual fund taxation, it is possible that AMCs may no longer be interested in issuing target maturity funds, or they may issue them bundled in with arbitrage.

For those who wish to know the basics of target maturity funds, we have a detailed FAQ. Here is a snippet.

1 What are Target Maturity Debt Funds? These are open-ended funds investing in various bonds with a specific maturity date. That is, before a given date, the fund manager will sell all the bonds and hold cash. After the maturity date, the cash will be proportionally distributed to unitholders.

In order to facilitate this process, all target maturity funds issued so far are index funds. That is, they track a bond index.

2 What is the benefit of a target maturity date? The NAV of a debt mutual fund fluctuates on a daily basis due to demand vs supply forces in the bond market. This is known as duration risk (or colloquially and incorrectly as interest rate risk). The longer the duration of the bond, the higher the fluctuations.

If a bond fund manager buys and holds 5-year bonds, the NAV fluctuations in the first holding will be highest. It will be lower in the subsequent years. So if the target maturity date is 5Y from now, the fund manager will buy bonds maturing a month or so before the fund maturity date. This will result in NAV growth with progressively decreasing volatility.

3 What return can I expect from these funds if I invest at the NFO stage? The worst mistake a debt fund investor can make is expecting some fixed return! The returns from these funds will depend on two primary factors: (1) Any sudden deviation in demand vs supply in the market (like it happened during the March 2020 market crash) will result in a deviation from the expected yield and actual yield; This is highly probably over the tenure of the fund.

(2) If the credit rating of a bond changes, then such a bond can be replaced by another. (3) Coupon payments will be reinvested at market price. In contrast, the yield to maturity (YTM) assumes the reinvestment is done at the issue price or current price.

These factors will result in a deviation of the actual return from the stated yield to the maturity of the portfolio at the NFO stage. Never forget that target maturity funds are market-linked products, and no return can be guaranteed. If the final return of the fund is close to the NFO YTM, it is more due to luck and not a plan.

Yes, there is a reasonable chance of getting a return close to the NFO YTM for purchases made at NFO. Subsequent purchases (SIP or set-up SIP) are made at market price, and the final return can differ from the initial YTM.

So these are not replacements for recurring deposits. They are less riskier than open-ended debt funds assuming no credit issues. That is about it. With the change in tax rule, they would be marginally more tax efficient than an RD.

Conservative investors or new investors can opt for an RD and sleep peacefully. Target Maturity Funds are only suitable for experienced debt mutual fund investors.

Do share this article with your friends using the buttons below.


🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥


Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!


New Tool! => Track your mutual funds and stocks investments with this Google Sheet!


  • Follow us on Google News.
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Join our YouTube Community and explore more than 1000 videos!
  • Have a question? Subscribe to our newsletter with this form.
  • Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!


Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.


Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.


Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   


Our new book for kids: “Chinchu gets a superpower!” is now available!

Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.

Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!

Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!

Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.

Buy the book: Chinchu gets a superpower for your child!


How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!


Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!


We publish monthly mutual fund screeners and momentum, low volatility stock screeners.


About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)


Connect with us on social media


Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.


Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.


Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)


 



RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisment -
Google search engine

Most Popular

Recent Comments