"Target Maturity Funds help investors lock in a particular yield," says Amit Somani of Tata MF

Everybody is talking about Target Maturity Funds these days. Why are these schemes suddenly in vogue?
Interest rates in the economy generally move in cycles. When interest rates move up, funds which can lock in the higher rates and offer predictable returns are in high demand. Target Maturity Funds are one such investment avenue for investors with a defined investment time horizon. These funds are passively managed and replicate a defined index.

TMFs are almost marketed like FMPs. Are they similar?
FMPs invest in debt securities of a specified duration as disclosed in the SID. FMPs are close ended Funds and offer exit to Investors only on maturity of the scheme. TMFs also have a fixed maturity. However, they replicate an index (as disclosed in SID). The one big advantage with these funds is that they are open ended, thereby enabling further subscription as well as redemption during the tenure of the fund.


Many mutual fund investors are looking at these schemes against the backdrop of rising interest rates. How will these schemes help these investors?
TMFs help investors lock in a particular yield if the investor holds the fund till maturity. These funds follow a roll down strategy over the investment period. It reduces the duration risk for investors having an investment time horizon closer to the maturity of the fund.

Do TMFs have an edge over regular or active debt schemes like long-term debt schemes and gilt schemes?
TMFs are managed passively and are suitable for investors looking for returns stability over volatility. Both strategies (active/passive) come with their own risk /reward characteristics. Passive Funds are suitable for the Buy and Hold style of Investors and are a good alternative for FD/NCDs given their tax efficiency.

There are various types of TMFs in the market now. How should investors choose?
Broadly TMFs can be categorized as funds investing in Index of either Sovereign Securities or Prime PSU/Corporate Debt securities or High Yield Securities (lower rated papers) or combination of these. Further, TMFs with various maturities (e.g. maturing in April 2026 or Dec 2027 or Dec 2029 etc.) are available, which can be selected based on an investor’s time horizon.

Who should invest in TMFs? Should it be a small allocation in one's portfolio?
Investors seeking to capture current yields in a tax efficient manner, with the comfort of predictability can Invest in TMFs. The open-ended structure of these funds add to the overall attractiveness. Allocation to these funds may be decided based on the objective of the Investor. Given rising (and higher) yields, TMFs compare favourably to different Investment products (FDs/NCDs/Tax-free Bonds etc.) on a post-tax basis, especially for high tax bracket Investors.

What is your take on the interest rate scenario? Do you think RBI will go for steeper rates considering globally that's the trend?
We believe the RBI will continue to lay emphasis on macro stability and price stability and will move in line with global central banks in terms of direction of policy. Having said that, inflation-growth dynamic in India might not warrant a similar quantum move by RBI as some of other central banks. Markets are already pricing in a Repo Rate of 6.50% to 6.75% by end of FY23 to maintain interest rate guard for our currency.