Home / Money / Personal Finance /  Is target maturity fund same as FMP?

When investing in debt mutual funds, it is better to match your investment horizon with the average maturity of the fund. By selecting a fund that has a maturity close to your investment horizon, you can lower the impact of volatility of bond price movements at the time of redemption.

Target maturity fund and fixed maturity plan (FMP) categories in the debt mutual funds have fixed maturities. That is, these funds invest in debt instruments maturing in line with the tenure of the scheme. For example, if the fund has set a fixed maturity of 5 years, it would buy 5-year debt papers in the first year, instruments maturing in 4 years in the second year and so on. Accordingly, the average maturity of the fund comes down with each passing year. Take for instance Bharat Bond ETF - April 2030, which invests in the Nifty Bharat Bond Index-April 2030, maturing in April 2030. The average maturity of the fund as of April 2022 would be 8 years. In April 2023, the average maturity comes down to seven years and so on.

These funds are considered to be better placed to manage volatility in the bond market through a buy-and-hold strategy. These typically hold the investments till maturity and then distribute the proceeds to the investors . Further, there is some degree of predictability on returns for those who stay invested until the maturity.

While both TMFs and FMPs have fixed maturities, there are certain differences between the two that investors need to be aware of.

One, while TMFs are open-ended debt funds, FMPs are close-ended. Thus, units held in FMPs can be redeemed only on maturity. Even though FMPs are listed on the exchange, the liquidity of these instruments is considered poor, posing liquidity issues.

The second difference pertains to the portfolio construction of these funds. TMFs are passively managed debt funds and invest predominantly in government securities, public sector undertakings (PSU) bonds, and state development loans (SDLs). On the contrary, FMPs can be subject to credit risk. “There have been instances of downgrades and defaults of instruments held by FMPs in the past and could be subjected to some credit risk based on the portfolio," said Rushabh Desai, founder of Rupee With Rushabh Investment Services.

Further, FMPs are costlier compared to TMFs when it comes to expense ratio. “TMFs are simple plain vanilla passive funds and have a lower expense ratio. TMFs that take the exchange-traded fund (ETF) route would be much cheaper," added Desai.

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