To lock into current interest rates, opt for a target maturity fund

In the recent past, fund houses have launched both target maturity funds (TMFs) and fixed maturity plans (FMPs).

- Sudipta Mitu

Both products serve a similar purpose – they allow investors to lock into the existing portfolio yield. If these products are held till maturity, they take away the mark-to-market risk caused by interest-rate fluctuations. However, experts suggest that investors should opt for the former, owing to their superiority on several counts.

One, FMPs are usually launched for a horizon of up to three years. TMFs are available for a wider range of tenures, going up to 10-11 years.

Two, TMFs also have portfolios with higher credit quality. They usually invest in government securities (G-Sec), state development loans (SDLs), and triple-A rated public sector unit (PSU) bonds. Thus, they are low on credit risk. FMPs, on the other hand, invest in corporate bonds, which could be of below triple-A rating as well. (However, the higher risk can translate into higher returns.)

Three, TMFs are more transparent. A TMF replicates a public index. At the time of investing, the investor knows which bonds will be included in the portfolio. In the case of an FMP, he will just know the indicative portfolio (the ratings of the bonds that the fund manager