- Date : 23/03/2023
- Read: 3 mins
Which is a better choice – Constant maturity fund or target maturity fund
There are different types of debt mutual funds available in the market. Each fund has its own investment objective and risk profile. Constant and target maturity funds are two debt funds whose portfolios have fixed maturities. However, they are not the same. Let’s understand these funds and which is a better alternative.
What are Constant Maturity Funds?
Constant maturity funds maintain a steady residual maturity at all times. For example, the fund invests in government securities with a maturity of 10 years. The fund will continue to retain this maturity no matter when you invest. For instance, say the fund was launched in 2022, and you invest in 2025. In both scenarios, the maturity of the fund would remain ten years.
The fund manager cannot increase or reduce the fund's duration as he has to maintain a constant maturity of 10 years.
What are target maturity funds?
Target maturity funds are slightly different from constant maturity funds. These funds also have a fixed maturity. However, the maturity reduces as the years pass. For instance, if the fund is launched in 2022 with a maturity of 10 years and you invest in 2025, you will get a residual maturity of 7 years.
Target maturity funds are passively managed funds like Exchange Traded Funds (ETFs), funds of funds, etc.
Difference between Constant maturity fund and Target maturity fund
So, Constant maturity funds or Target maturity funds, which funds are better for you?
Both funds have pros and cons –
Target maturity funds close after the portfolio maturity ends. Hence, you cannot invest in these mutual funds beyond their maturity.
If you have a long-term investment horizon and want to invest in target maturity funds, you must switch your investment when the fund’s maturity expires. This switching involves a share of reinvestment risk as the interest rates might change over time.
Constant maturity funds are suitable for long-term investments. However, these mutual funds might not prove feasible if you have a short-term investment horizon.
The target maturity fund usually offers the same return as the yield of the underlying security. However, you can get higher or lower returns in constant maturity funds, making the returns uncertain.
While constant maturity funds might appeal to some investors for their investment plan, target mutual funds appeal to others. So, assess your investment needs, horizon, financial goals, and the pros and cons of both these mutual funds and then make a choice. Create a suitable investment plan so that you can maximise the returns and minimise the risks.