Interesting Debt Investment Option – Target Maturity Funds

Even as equity investors are still waking up from the end of the rosy period of last year, Debt investors are equally confused as to where to invest. But there is a new buzzword making its rounds among those looking for predictability and security in their Fixed Income investment returns – Target Maturity Funds.

What are Target Maturity Funds?

Target Maturity Funds are open-ended roll-down passive debt funds with the maturity date clearly described in the title itself. These funds mirror indices made up of bonds maturing at a certain specific timeline.

In some ways, they are like another debt product that was highly favoured by investors till some years back, namely Fixed Maturity Plans or FMPs. However, unlike FMP Target Maturity funds are more flexible considering their open-ended nature. So, in the case of a new fund infusion, the management buys funds in the same duration range so as to coincide with the target maturity of the fund.  

Types of Target Maturity Funds?

The good thing is that most Target Maturity funds focus on very high-grade credit quality. They mostly invest in three types of debt assets – Government securities, SDL or State Development Loans, and CPSU or Central PSU bonds (only AAA-rated entities). Hence, there is hardly any default risk associated with this category.

Since these are passive debt funds, the fund names mention the index being followed. Also, often some of the funds have a mix of the type of bonds. A very common mix is AAA PSU and SDL bonds in varying ratios, which again are often mentioned in the fund name. Some examples of self-explanatory names are Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 2026 60:40 Index Fund, ICICI Prudential PSU Bond Plus SDL Sep 2027 40:60 Index Fund, and Axis Nifty AAA Bond Plus SDL Apr 2026 50:50 ETF FoF.

Another factor to differentiate Target Maturity funds is the length of the tenor. There are some funds maturing as soon as 2024 whereas there are quite a few in the 2027-2030 range also. Finally, there is also the Nippon Lakshya Nivesh which is a 22-year duration government bond fund.

Why are they good investment options currently?

In today’s fixed-income scenario, Target Maturity funds are one of the best options to invest in. There are a host of benefits in doing so.

  • Negligible credit risk

As mentioned above, most of these funds operate in the cleanest quality spectrum. Hence, there is barely any need to check for the proportion of the credit rating of the portfolio.

  • Predictable and high returns

When the fund is held to maturity, returns are expected to be similar to the net yield to maturity (YTM less the expense ratio) from the invested point. The variance in returns is bound to be very little irrespective of yield movements. Today, there are many funds in the duration range of 2025 and higher where the yields are more than 7.20%. There are some funds like the Bharat Bond series of 2030, 2031, and 2032 where the yields are in the range of 7.69%-7.75%.

  • Lower tax

When invested for a period of more than three years, indexation kicks in making the taxation far more efficient. Even if we consider an inflation rate of 4% in the CII (Cost of Inflation Index), then the effective tax comes to about 11.5%, much lower than the higher brackets of marginal tax.

  • No Lock-in

These funds are open-ended in nature. Unlike equity funds, most funds in this category don’t even have an exit load for any duration. Edelweiss is an exception with some funds having a minuscule exit load for the first 30 days of investment.

  • Diversified portfolio

While there are investors who believe in curating their own bond portfolios, these funds have the benefit of a well-diversified professionally managed portfolio.

  • Low cost

When you combine debt and passive, you know the costs are bound to be low. This shows in most category funds having their Direct expense ratios at as low as 0.15%-0.20%.

  • Options worth considering

Having said all this, below are some of the funds with a minimum AUM of Rs. 1,000 Crores that can be considered for addition to any Fixed Income portfolios. Remember that it is only if you hold to maturity for funds beyond July 2025 that the benefit of indexation will kick in:

Scheme NameYTMFund SizeAvg Maturity (Yrs)MoD (Yrs)
IDFC Banking & PSU Debt Fund – Direct6.1716,3830.800.73
Edelweiss MF Bharat Bond ETF FOF Series April 20307.6913,1667.575.38
Edelweiss MF Bharat Bond ETF FOF Series April 20317.6910,4988.645.93
Edelweiss MF Bharat Bond ETF FOF Series April 20257.249,9482.742.28
Edelweiss MF Bharat Bond ETF FOF Series April 20327.756,8509.786.57
Edelweiss Nifty PSU Bond Plus SDL April 2026 50:50 Index7.376,1233.492.98
Edelweiss MF Bharat Bond ETF FOF Series April 20236.395,4860.830.70
Nippon India ETF Nifty SDL Apr 2026 Top 20 Equal Weight7.355,4233.562.98
Aditya Birla Sun Life Nifty SDL Plus PSU Bond Sep 2026 60:40 Index Fund – Direct Plan7.4652303.883.21
SBI CPSE Bond Plus SDL Sep 2026 50:50 Index Fund – Direct Plan7.334,6603.933.26
ICICI Prudential PSU Bond Plus SDL Sep 2027 40:60 Index Fund- Direct Plan7.4139164.833.85
DSP Savings Fund-Direct Plan6.0824080.720.67
Edelweiss  Nifty PSU Bond Plus SDL Index Fund – April 20277.422,3794.473.64
Aditya Birla Sun Life CRISIL SDL Plus AAA PSU Apr 2027 60:40 Index Fund – Direct Plan7.5720364.443.66
Nippon India Nivesh Lakshya Fund – Direct Plan7.58186522.2810.28
Nippon India ETF Nifty CPSE Bond Plus SDL – 2024 50:506.851,8612.111.84
Kotak Nifty SDL Apr 2027 Top 12 Equal Weight Index Fund – Direct Plan7.591,0884.643.77
Axis Nifty AAA Bond Plus SDL Apr 2026 50:50 ETF FoF – Direct Plan7.339973.432.87