Target maturity funds have the shine, but experts say stagger bets

Visible returns, high quality portfolios, attractive yields, low expense ratio and liquidity are attracting investors to target maturity funds. Fund houses are continuously adding products through new fund offers (NFOs) and now investors can choose across different maturities - from 2026 to 2037.

However, financial planners believe investors should not allocate money to a single scheme - and at one go. They could invest two-thirds of their money now into schemes that mature in 3-to-5 years and the balance over the next three months as and when interest rates peak out.

Financial planners point out that currently, target maturity funds that have a residual maturity of up to 5 years could give pre-tax returns of 7.25-7.5%. Post indexation, investors could earn post-tax returns of 6.9-7%.

"While the current rates are attractive, they are yet to peak and there will likely be one or two rate hikes and hence it makes sense to only deploy two thirds of your money now," said Nirav Karkera, head (research), Fisdom.

Nirav believes the balance money could be allocated to liquid and ultra-short term funds where investors can earn close to 6% and moved to target maturity funds slowly as and when interest rates peak out.

Many investors like these funds because there is visibility of returns and no mark to market losses if held to maturity. Since these funds are open-ended, the investor has the option to redeem funds in case of a likelihood of default or a credit downgrade in a security held in the portfolio.

Typically, target maturity funds hold high quality papers like government securities, public sector undertaking (PSU) bonds and state development loans (SDLs).

Currently SDLs and PSU bonds could offer about 20 basis points higher returns than similar tenure government securities.