Target Maturity Debt fund is where I invest my no-risk portion of the portfolio, not in bank FDs. This is my way of ensuring I earn better than FD returns with lesser risk and excellent tax benefits
Products like Target Maturity debt funds are godsend for taxpayers.
Here are some of the reasons why:
1. Returns are very predictable if held until maturity.
2. Interest rates are better than or on par with popular Bank FDs.
3. If the fund Maturity timeline is 3+ years then tax on interest is 20% plus indexation benefits over and above that . This brings the tax down to low single digits. This is a major advantage of Target Maturity debt funds - Predictable return with tax benefit
4. Underlying holdings of these funds are Government of India securities, State government bonds or Public sector bonds. Default risks on these bonds are way lesser than Banks as per my analysis.
5. These are highly liquid instruments. I can sell them whenever I want. Returns may vary slightly if sold before maturity because these funds are marked to market. Hence the value changes based on interest rate variations. However, predictable returns can be expected if held until maturity.
6. No intermediary risks. When I invest, my money goes directly from my Bank to the Mutual fund house. And vice versa if I sell the fund. Upon Maturity, funds are directly deposited to my Bank account. Money does not go to any intermediary like a brokerage house, distributor or advisor. Thanks to the regulator SEBI, this process is ironclad
But, as with any investment product, it is important to fully understand the instrument we put our hard earned money into.
Even with Target Maturity funds, it is important to understand things like Yield to Maturity, Average Maturity, underlying holdings, interest rate spreads, expense ratios, interest rate sensitivity, taxation etc before zeroing in on a particular fund
I can’t think of any reason not to like Target Maturity Debt funds.
If you can think of any, please let me know 😊