One category of debt mutual funds that is rapidly gaining in popularity these days is target maturity funds (TMFs). When interest rates rise, as they are expected to in the near future, the net asset values (NAVs) of most open-ended debt funds take a hit. Investors can avoid this problem by investing in a TMF.
Seeing the rising popularity of these funds, many fund houses have launched them in recent times-Edelweiss, Nippon India, IDFC, ICICI Prudential, Aditya Birla Sun Life, and so on.
Avoid interest-rate risk
These funds invest their corpus in an index. This enhances the transparency of these funds. At the time of investing, the investor can see the bonds that have been included in the index and hence knows where his money will be invested.
These funds also do not carry default risk. These indices are generally composed of government securities, state development loans, and AAA- PSU (public sector unit) bonds, which have high credit quality.
A diversified portfolio of these bonds further reduces the risk for investors.
TMFs have a fixed tenure. If the investor holds these funds till maturity, he is not affected by the mark-to-market impact on the portfolio of rising interest rates.
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