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Target Maturity Funds (TMFs) made a strong debut in India’s bond market with the launch of the Edelweiss Bharat Bond ETF in December 2019, hailed as a transformative step for fixed-income investors. They drew early attention for their defined maturity structure, government backing, predictable returns, AAA-rated portfolios, tax efficiency through indexation, and ultra-low expense ratios of just 0.0005 per cent. However, the 2023 Union Budget’s removal of indexation and long-term capital gains benefits for debt mutual funds eroded much of this initial appeal. TMFs are passively managed funds designed to replicate the performance of their benchmark indices by investing in the underlying fixed-income securities in the same proportion. According to ACEMF data, there are currently 103 TMFs in the market—six ETFs and the rest index funds. Being open-ended in structure, TMF ETFs can be traded on stock exchanges during market hours, while index fund variants can be purchased or redeemed on business days like any regular mutual fund. Index funds also offer both growth and dividend options. Regulations restrict these passive debt funds to investing only in Government securities (Gilt), State Development Loans (SDLs), and AAA-rated bonds with maturities of up to 15 years. In contrast, active gilt and bond funds can invest across maturities and credit spectrums as permitted under their categories. SEBI has recently allowed passive debt funds focused on the financial services sector to invest up to 100 per cent in NBFCs and housing finance companies — a flexibility not available to active debt funds due to sectoral caps. This has opened new avenues for TMF investors. Given their open-ended nature, TMFs continuously receive new inflows and redemption requests. Fresh inflows must be deployed within seven days into bonds that match the fund’s target maturity. When the exact bonds from the index are unavailable, fund managers are permitted to buy up to 20 per cent of securities outside the index, provided they have similar maturity and credit quality. Coupon payments from these bonds are reinvested, enhancing compounding and overall returns. TMFs are classified based on the type of debt instruments they hold — Government securities (Gilt), State Development Loans (SDLs), PSU bonds, corporate bonds, or hybrid combinations such as Gilt + SDL or Corporate + SDL. Their risk-return profiles differ accordingly. For instance, among two-year TMFs, Aditya Birla SL CRISIL IBX Gilt Apr 2028 Index Fund had a YTM of 5.96 per cent as of September 2025, while Edelweiss CRISIL IBX AAA Financial Services Bond – Jan 2028 Index Fund offered 7.02 per cent. Gilt funds carry negligible credit risk due to sovereign backing, resulting in relatively lower yields compared with corporate bond TMFs that offer higher yields to compensate for credit risk. TMFs with residual maturities of 2–5 years offered YTMs between 5.95 and 7.05 per cent, while those maturing in 5–8 years yielded 6.36–7.3 per cent. TMFs with 8–10-year maturities provided YTMs ranging from 6.86 to 7.26 per cent. Key considerations Return Predictability: TMFs offer return visibility that traditional open-ended debt funds often lack. At the time of the New Fund Offer (NFO), Asset Management Companies (AMCs) disclose the fund’s indicative Yield to Maturity (YTM), representing the potential return if held to maturity. Post-launch, AMCs display YTMs on their websites—daily for ETFs and once a fortnight for index funds. Liquidity: With fewer new launches in recent times due to a low interest rate environment, investors can explore existing TMFs in the market. These currently have residual maturities of up to 11.4 years. While index funds can be bought directly from fund houses, ETF units are available in secondary markets. However, liquidity in ETFs can sometimes be limited. Since they trade on exchanges, the presence of active buyers and sellers is crucial for fair pricing. Poor liquidity can result in units trading at a premium, reducing potential returns. Of the six ETFs, three recorded average daily trading volumes above ₹1 crore over the past month—Bharat Bond ETF – April 2030 (₹3.4 crore), Nippon India ETF Nifty SDL – 2026 Maturity (₹1.4 crore), and Bharat Bond ETF – April 2031 (₹1.1 crore). Expenses: Bharat Bond ETFs continue to offer the lowest expense ratio at just 0.01 per cent as of September 2025. Regular index fund plans range between 0.2 and 1 per cent. Their direct plans are more cost-effective, with fees between 0.08 and 0.49 per cent. Should You Invest? TMFs, with their predictable return profile, are well-suited for goal-based investments. Currently, there are 26 TMFs with a residual maturity of 2–5 years, 17 funds maturing in 5–8 years, and five funds with 8–11.4-year maturities. Investors can align these options with their investment horizons and allocate accordingly toward short-, medium-, and long-term financial goals. TMFs with higher YTMs in these segments include Edelweiss CRISIL IBX AAA Fin Serv Bond – Jan 2028 Index Fund (7.05 per cent), BHARAT Bond ETF – April 2032 (7 per cent), Kotak Nifty SDL Jul 2033 Index Fund (7.3 per cent), and Edelweiss CRISIL IBX 50:50 Gilt+SDL April 2037 Index Fund (7.18 per cent). TMFs also help minimize interest rate risk when held till maturity. For smaller investors seeking fixed-income exposure, index funds are often a more convenient choice than ETFs, given their simpler structure. With a wide range of offerings, investors can select funds based on their risk appetite. Gilt TMFs appeal to those prioritizing capital safety, while TMFs with allocations to financial services bonds can potentially deliver higher yields compared to gilt or SDL-based TMFs. When selecting funds, it’s advisable to prefer those with lower expense ratios, minimal tracking error, and a larger corpus. Under the current tax framework, gains from TMFs are taxed according to the investor’s income tax slab, similar to interest earned on bank deposits. Despite the withdrawal of indexation benefits, TMFs remain relevant for conservative investors—especially retirees and individuals with annual incomes up to ₹12 lakh—who seek stability and predictability in returns. Published on October 25, 2025
