The fixed-income market currently has little room for flexibility, prompting traditional investors to look for alternatives within the debt space. Consequently, many of them have turned to target maturity funds (TMF) in the hope that these schemes can serve as a buffer against risks.

The TMF genre, which helps investors align their portfolios with maturity dates, is passively managed in keeping with an index. In each case, the index’s constituents have maturities matched with the fund’s maturity, a feature that brings these products close to fixed maturity plans (FMPs). FMPs, however, are different because of their closed-end nature. TMFs are, in contrast, open-end and so, investors can enjoy ample liquidity.

The idea draws strength from the fact that the investments in TMFs (in this case, bonds and gilts) are held to maturity. The duration, therefore, reduces with time; those who have invested in it become much less susceptible to uncertainty. For many participants, passive management is a major attraction, and for some others, TMFs are value-additions to portfolios that otherwise include conservative debt products. Investors can consider these as diversifiers—TMFs score well in terms of liquidity and stability.

Recently, fund houses have come up with gilt-based target date products. These are loyal to government securities and are thus considered safe. They are often considered ideal for medium- and long-term savers, who do not wish to adhere merely to interest-bearing assets.

For example, a fund that matures in 2030 will allocate to securities that matures in about the same period. The theory has been captured recently in a product introduced by IDFC Mutual Fund. The proposed IDFC CRISL IBX Gilt April 2026 Index Fund has come in the shape of a TMF with an underlying index. Shifting yields are expected to work in its favour, particularly for investors who can align their time horizon with the target year, that is, 2026. The fixed-income space, now faced with a mix of curious conditions, is the breeding ground for product innovations. The recent instance of Edelweiss Nifty PSU Bond Plus SDL Index Fund 2026 is an example. Incidentally, those who have invested in such funds are well aware that the banking regulator is a lot less accommodative these days than earlier; its latest actions regarding the policy rate stem from rising prices. Retail inflation has accelerated lately, moving perceptibly above 7 per cent at the end of the previous month.

The scenario has triggered extreme reactions from some quarters. But those who depend heavily on interest income are said to have found relief because of the higher rates on fixed deposits. The situation will now attract newer allocations in deposits, it is felt. Such a trend will likely emerge stronger in the days ahead because the regulatory stance is in favour of an even higher repo rate. Whether the latter will fructify will probably be clear in December, when the apex bank releases its next monetary policy. As a genre, TMFs will face great competition in the near future.

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MF Strategy

Investors may consider the following points as part of their strategy for TMFs

• These funds should be ideally held to maturity. Investors should try not to exit before the target period. Early exits may undermine their basic goals.
• The idea is to focus on predictable returns. This will help investors choose between dynamic products like TMFs and traditional options like fixed deposits.
• Interest rates are changing and the trend is likely to sustain till inflationary conditions become stable. Therefore, investors must allocate to products that combine liquidity and stability.
• A TMF can act as a “satellite” investment; it can be a good addition to an active “core”. The latter may comprise all other normal debt categories—gilt funds, corporate bond funds, floating rate funds, and so on.
• In a TMF, the maturity will gradually come down till the fund reaches the terminal point. The investor’s philosophy must recognise this as the motherlode.

The author is Director, Wishlist Capital