Are Target Maturity Funds an alternative to FDs?

Once upon a time, most retail investors believed that bank fixed deposits (FDs) were the best means to earn returns and ensure absolute safety of the principal being invested. This was a time when people had low disposable incomes and had to save meticulously to create a corpus for investing. Then came the desire to earn high returns and many brave investors turned towards the equity market to realise unprecedented gains. However, intrinsic risk was a primary aspect of equity investments and a number of the intrepid also suffered severe losses. If you are someone who does not want to take on too much risk but is keen on finding an alternative to FDs, then it is time to add target maturity funds to your portfolio.

Decoding Target Maturity Funds (TMFs)

In essence, target maturity funds are passive debt mutual fund schemes which invest their corpus in only sovereign or quasi-sovereign bonds. These include government securities, state development loans, and bonds issued by public sector units – securities which are highly rated and possess an exceedingly low or almost no risk of defaulting or causing losses. In this manner, target maturity funds can be considered an alternative to FD as both these investment options are highly secure. Further, target maturity funds have a fixed duration so it is also easy to assimilate them into your portfolio, in alignment with your time horizon. You can pick from two target maturity fund options – index funds or exchange traded funds, based on your return requirements and investment objective. 

TMF – An alternative to FD

There are many benefits of target maturity funds and these serve as the reasons for why they are an alternative to fixed deposits. Let us take a look at some of these aspects, which should play an important role in helping you pick the best option for yourself.

• As safe or safer than FDs: Yes, FDs are considered extremely safe but the safety of your investment depends on the wellbeing of the entity offering the facility. If you look for lower rated corporates which offer you higher rates on your FD, you may end up facing defaults, as witnessed by many investors in the past. On the other hand, the sovereign and quasi-sovereign nature of the bonds held by TMFs ensure a fairly high degree of safety.
• Participate in the market: Even though TMFs have an inherently safe nature, they still allow you to participate in the growth of the market, since the performance of your scheme would be benchmarked to an index or will be based upon the exchange. When you invest in FDs, you will only be able to earn returns as promised by the bank or the underlying entity.
• Lock-in your returns: When you invest in TMFs during a high interest regime, you have the ability to lock-in high returns if you stay invested through the duration of the fund. This is because TMFs do not trade the bonds they invest in, so even if the repo rate falls at a later stage, you will still continue to receive the previously higher rates. This is not the case with FDs as the interest on bank FDs fluctuate in line with the repo rate movement.

How to invest in TMFs

If you want to invest in target maturity funds, you can follow these steps and lock-in your returns at the currently high rates. Start by evaluating your personal investment factors such as your return requirements, investment goals and time horizon. Once you have these details handy, it will be easier to choose a fund which matches your needs. Pick a fund house which has managed to offer robust returns on a historic basis and then choose a fund which aligns with your time horizon and return requirements. Once this is done, you can begin your investment journey through either the lumpsum or systematic investment plan route.

Inarguably, TMFs can be a great alternative to FD, especially in a high interest rate regime. However, considering that the true benefits of such an investment can only be reaped if you stay invested through the tenure of the fund, you must ensure that it is well-aligned with your portfolio goals.

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