Target maturity funds: How to use them to lock into rising yields | Personal Finance
The 10-year government security (G-sec) yield touched 7.19 per cent on September 28, 2026, giving retail investors an opportunity to lock in attractive yields through target maturity funds (TMFs). The choice of fund must reflect how long they can stay invested.
Value emerging
Value is emerging in the bond market. “Two- to three-year AAA-rated bonds are offering yields of around 7.5–7.75 per cent,” says Dhawal Dalal, president and chief investment officer (CIO) – fixed income, Edelweiss Mutual Fund (MF).
“Yields near 7.2 per cent with the repo rate at 5.25 per cent imply an unusually wide term premium, making locking in appealing,” adds Vijay Kuppa, chief executive officer (CEO), InCred Money.
TMFs differ from bank fixed deposits (FDs) in how they respond to market yields. “They reflect movements in bond yields and can respond to market yields faster than bank FDs,” says Manish Srivastava, executive director, Anand Rathi Wealth. Banks are more likely to raise FD rates after the Reserve Bank of India (RBI) increases the repo rate.
How they work
TMFs have a simple structure. They hold bonds that mature around the fund’s target date. Investors receive their investment proceeds on the predefined maturity date.
A TMF mainly invests in government securities (G-secs) issued by the central or state governments and AAA corporate bonds. These open-ended funds allow investors to redeem units whenever they want, unlike fixed maturity plans.
High credit quality
TMF portfolios have high credit quality. Holding a TMF until maturity eliminates interest-rate risk. “Their return profile becomes more predictable when held to maturity,” says Dalal.
These funds track an underlying index, which eliminates fund manager risk.
TMFs versus FDs
Debt fund gains are taxed at the marginal rate, like FD income. However, they are treated as capital gains rather than accrual income. “Eligible capital losses can be set off against capital gains,” says Srivastava. Capital losses cannot be adjusted against the interest income from an FD.
TMFs allow anytime redemption at net asset value (NAV), whereas premature withdrawal from an FD can attract a penalty. “TMFs offer exposure to multiple securities, whereas an FD places money with a single institution,” says Juzer Gabajiwala, director, Ventura.
Tax on TMFs is payable only on redemption and not on annual accrual. “Returns compound on a pre-tax base, with no drag caused by tax deducted at source (TDS),” says Anurag Mittal, president and head – fixed income, UTI Asset Management Company (AMC).
Bond prices tend to rise when interest rates fall. “A TMF can hence provide opportunities to realise mark-to-market gains,” says Gabajiwala.
Key risks
Like all debt funds, TMFs experience interim volatility. “Long-term TMFs would offer the highest yield but would also carry the largest mark-to-market risk,” says Kuppa.
The final return can vary slightly from the index yield to maturity (YTM) at entry. “Coupon reinvestment, fund expenses, and cash holdings can create tracking differences,” says Dalal.
Liquidity can become a concern if investors need to withdraw before maturity.
TMFs also carry reinvestment risk: Investors may be unable to reinvest at similar or higher rates as market conditions change. Inflation can erode real returns.
Choose the right tenure
The one- to three-year segment currently offers attractive risk-adjusted returns. “This segment has relatively higher secondary market liquidity. Investing in it could also limit volatility if policy rates rise,” says Dalal.
Investors may also opt for TMFs investing in AAA public sector undertaking (PSU) bonds and state development loans (SDLs). “Three- to five-year AAA PSU bonds at around 7.90 per cent offer an attractive balance of yield, duration, and credit quality,” says Mittal. He adds that SDLs at maturities exceeding 10 years currently offer attractive spreads even over many corporate bonds.
Srivastava opines that current yields are attractive enough to consider locking in for 10 years.
Investors should determine their horizon first and match the TMF’s maturity date to it, rather than choose solely on the basis of current YTM. Investing without understanding the horizon turns the outcome into an interest-rate bet.
An investor with a two-year horizon should avoid a 10-year TMF. “Its modified duration could be closer to six years, increasing interest-rate risk if yields rise,” says Srivastava.
Portfolio composition
Investors seeking to minimise credit risk should consider TMFs that hold central or state government securities. “TMFs investing in G-secs carry sovereign credit risk and the highest underlying market liquidity. SDLs currently offer attractive spreads over G-secs,” says Mittal.
AAA PSU bonds typically offer strong credit quality, supported by government ownership and strategic importance, as well as relatively good liquidity. AAA private corporate bonds carry relatively higher credit and downgrade risk over the fund’s life.
Investors in AAA-rated PSU or corporate bond TMFs should compare rates with FDs issued by AAA-rated entities or strong banks. “Comparing small finance bank FD rates with AAA-rated corporate bond yields is inappropriate because their risk profiles differ,” says Gabajiwala.
Checks before investing
Investors should examine the fund’s maturity date and the securities in its portfolio. The credit mix should match their risk appetite.
The expense ratio affects the final return and merits close attention. Investors should also check the tracking difference, which shows how faithfully the fund replicates its index.
Assess suitability
TMFs suit investors who have a defined investment horizon and need debt exposure of sound credit quality. “Those who are uncertain about their horizon may have a less favourable experience if they redeem before maturity,” says Dalal.
Investors must be able to tolerate interim NAV volatility. Those who may need money at very short notice should also consider other options.
Consider staggered entry
Yields could rise further. “Fiscal pressure, inflation risks from higher oil prices and El Niño could accentuate the pressure on bond yields,” says Mittal. Rate hikes by the US Federal Reserve could also lead push rates higher in India.
“Staggered entry over a few months might make more sense for retail investors,” says Kuppa.
The writer is a Mumbai-based independent journalist
