Think of a recurring deposit you open for your daughter’s college fees, due in 2030. You know the date, you have a fair idea of the amount, and you do not touch the money in between. Now imagine a mutual fund built the same way, holding government and public sector bonds instead of a bank deposit. That is the basic idea behind a target maturity fund.<\/p>\n\n
The timing matters. The RBI raised the repo rate by 25 basis points to 5.50% on 7 October 2026, and the 10-year government bond yield climbed above 7.3% in mid-October, its highest level in about three years. Higher yields make a fund that holds today’s yield until a fixed date more interesting.<\/p>\n\n
A target maturity fund is an open-ended debt index fund or ETF that holds bonds maturing on or just before a fixed date, such as April 2030, and then closes and returns your money. It copies a bond index with the same end date. If you stay invested till maturity, your return tends to stay close to the yield at which you invested, minus expenses.<\/p>\n\n
Most hold central government securities, state development loans (bonds issued by state governments) or public sector bonds. Because they follow an index, nobody is betting on where rates go next, and you can buy or sell units on any business day at that day’s NAV.<\/p>\n\n
Roll-down means the fund’s bonds move closer to maturity every day, and the fund does not swap them for longer bonds. So the fund’s remaining life, and its sensitivity to interest rate changes, keeps shrinking. A fund with five years left today behaves like a four-year bond next year and like a one-year bond in its final year.<\/p>\n\n
Picture a train from Mumbai to Pune. At Dadar, a one-hour delay matters a lot, because the whole journey is still ahead of you. By Lonavala, the same delay barely matters, because little track is left. A target maturity fund rolls down the same way: the closer it gets to its end date, the less a change in interest rates can disturb its value.<\/p>\n\n
You receive that day’s NAV, and that NAV depends on where bond yields stand. If yields have risen since you invested, the NAV will be lower than the path you expected, and your return may fall short of the yield you started with. If yields have fallen, you may earn more. The starting yield is a fair guide only if you hold till the end.<\/p>\n\n
To put this in perspective, a fund with about four years left has a duration (a measure of how much its price reacts to rate changes) of a little under four years. So a 0.50 percentage point rise in yields could pull its NAV down by roughly 1.75% to 2% in the short run. Our explainer on how bond yields affect debt fund NAV<\/a> covers this price effect in detail.<\/p>\n\n Notice that the fund keeps earning its yield every day, so a dip tends to fade as maturity approaches. The real risk is needing the money early, during a bad patch.<\/p>\n\n For units bought on or after 1 April 2023, gains from a target maturity fund are added to your income and taxed at your slab rate whatever the holding period, with no indexation benefit. The tax falls due only in the year you redeem or the fund matures. FD interest, on the other hand, is taxed every year as it accrues.<\/p>\n\nFeature<\/th> Target maturity fund<\/th> Bank FD<\/th> Open-ended debt fund<\/th><\/tr><\/thead> Fixed end date<\/td> Yes<\/td> Yes<\/td> No<\/td><\/tr> Return if held to the end<\/td> Close to the starting yield, minus expenses, not guaranteed<\/td> Fixed rate agreed with the bank<\/td> Moves with market yields<\/td><\/tr> Exit before the end<\/td> Any business day at market NAV<\/td> Allowed, with a penalty set by the bank<\/td> Any business day at market NAV<\/td><\/tr> Rate sensitivity<\/td> Shrinks as maturity nears<\/td> None on the principal<\/td> Stays in a set range<\/td><\/tr> Safety net<\/td> Mostly government or PSU bonds, no insurance<\/td> DICGC cover up to Rs 5 lakh per depositor per bank<\/td> Depends on the portfolio<\/td><\/tr> When tax is paid<\/td> On redemption or maturity, at slab rate<\/td> Every year on accrued interest, at slab rate<\/td> On redemption, at slab rate<\/td><\/tr><\/tbody><\/table><\/figure>\n\n How are target maturity funds taxed after April 2023?<\/h2>\n\n