Traditional Indian savers who have been parking the bulk of their disposable income into traditional debt products such as bank’s Fixed Deposit, Post Office Saving Scheme, and Public Provident Funds, which deliver quite predictable and stable returns, may find Target Maturity Debt Funds (TMDF) to be a breath of fresh air.
Even though there are a plethora of new financial instruments available to investors, bank deposits remain to be a popular choice. Bank deposits make for 52 percent of total household savings, with life insurance (23 percent), currency (13 percent), and mutual funds (13 percent) following closely behind (7 percent ). As a result, mutual funds are now introducing Target Maturity Debt Funds to tap into the enormous pool of fixed deposit investors.
What Is This Instrument, TMDF?
Target Maturity Debt Funds are a type of passive debt fund that is still evolving. The composition of the underlying bond index determines how funds are deployed by a fund manager. In India, underlying bond indexes are primarily made up of securities that are backed by the government’s sovereign guarantee or are held by the government, giving investors confidence in a guaranteed return and capital protection.
As a result, the TMDF tracks the underlying index’s performance. These funds have a set maturity date that corresponds to the maturity date of the bonds in their portfolio. It provides a lot of transparency because the security selection of the underlying bonds is done by an index construction business. It also has the advantage of a natural roll-down strategy, which means that if a fund acquires a new asset, it has a maturity that matches the remaining tenor of funds due to inflows and outflows, maintaining the fund’s overall maturity on the same glide path as its original portfolio.
Depending on how fund houses shape their products, there are numerous Nifty PSU Bond plus SDL 40:60 indices accessible. The Nifty PSU Bond plus SDL September 2027 40:60 index, for example, is the underpinning for ICICI Prudential. Eight AAA PSU bonds account for 40% of the index, while 20 State Development Loans account for the remaining 60%. On September 30, 2027, the underlying fund will mature.
On the base date, the index constituents of the underlying index are equally weighted, and the index will be reviewed quarterly. The NTPC, PowerGrid, NHPC, and Power Finance bonds are all part of the eight PSU bonds, while the SDL of Andhra Pradesh, Kerala, Bihar, and Madhya Pradesh are among the 20 SDL in the underlying index.
When it comes to maturity, the maturity proceeds from any or all SDLs in the scheme’s portfolio will be invested in Treasury Bills until the scheme’s maturity date. So, if you’re wanting to invest with a deadline of mid-2027, this is one option that could show to be relatively safe, dependable, and tax-efficient.