Target Maturity Fund vs FMP — Which is More Predictable?
Target Maturity Funds and Fixed Maturity Plans both offer predictable debt fund returns, but TMFs provide far better liquidity. FMPs are marginally more predictable but lock your money with almost no exit option.
You have a lump sum sitting idle. You want predictable returns without stock market risk. Two options keep coming up — Target Maturity Funds and Fixed Maturity Plans. Both fall under debt mutual funds, but they behave very differently.
Picking the wrong one could lock your money with no exit or leave you exposed to interest rate surprises. Here is a clear breakdown of how each product works and which one deserves your money.
What Is a Target Maturity Fund?
A Target Maturity Fund (TMF) is an open-ended debt fund with a fixed maturity date. It invests in government bonds, state development loans, or PSU bonds that mature around the same date as the fund itself.
As bonds in the portfolio mature, proceeds are reinvested in similar bonds maturing near the target date. This roll-down strategy means the fund's duration keeps shrinking over time. The closer you get to the maturity date, the more predictable your returns become.
TMFs trade on stock exchanges like ETFs. You can also buy or redeem them directly with the fund house. This gives you liquidity that FMPs simply cannot match.
What Is a Fixed Maturity Plan?
A Fixed Maturity Plan (FMP) is a close-ended debt fund. It opens for subscription during a specific window, buys bonds matching its tenure, and locks your money until maturity. There is no early exit through the fund house.
FMPs do get listed on stock exchanges after the subscription period. But trading volume is almost zero. If you need to sell before maturity, you will struggle to find buyers. The price you get may be far below the actual value of your units.
The bonds inside an FMP are held until they mature. This eliminates reinvestment risk and interest rate risk almost entirely. Your return depends on the yields locked in at the time of purchase.
How Predictability Works in Both Products
Predictability in a debt mutual fund comes from two things: knowing what yield the bonds carry and knowing those bonds will be held to maturity. Both TMFs and FMPs score well on these counts, but through different mechanisms.
In a TMF, the roll-down approach gradually reduces sensitivity to rate changes. Early in the fund's life, NAV may swing a bit if rates move sharply. But as the maturity date approaches, the NAV stabilizes because remaining bonds are very short-term.
In an FMP, there is no trading at all. Bonds sit in the portfolio from day one until maturity. The yield-to-maturity at launch is your approximate return. There is virtually no deviation unless a bond defaults.
Target Maturity Fund vs FMP — The Comparison
| Feature | Target Maturity Fund | Fixed Maturity Plan |
|---|---|---|
| Structure | Open-ended | Close-ended |
| Liquidity | High — redeem anytime or sell on exchange | Very low — listed but barely traded |
| Return predictability | High if held to maturity | Very high — bonds held to maturity |
| Interest rate risk | Low and decreasing over time | Nearly zero |
| Reinvestment risk | Minimal — roll-down strategy | None — no reinvestment happens |
| Minimum investment | As low as 500 rupees (ETF variant) | Typically 5,000 rupees during NFO |
| Entry timing | Anytime | Only during NFO window |
| Expense ratio | 0.10% to 0.30% | 0.20% to 0.50% |
| Credit risk | Low — mostly government bonds | Varies — can include corporate bonds |
| Taxation (post April 2023) | Taxed at slab rate | Taxed at slab rate |
Where TMFs Win
Liquidity is the biggest advantage. You can sell a Target Maturity Fund on any trading day. If an emergency strikes or you find a better opportunity, your money is not trapped.
TMFs also let you invest anytime. You do not need to wait for an NFO window. If interest rates rise and bond yields look attractive, you can enter immediately and lock in those yields for the remaining tenure.
- Open-ended structure means flexibility to enter and exit
- Lower expense ratios, especially for ETF variants
- Government bond focus keeps credit risk near zero
- SIP option available in some TMF variants
Where FMPs Win
Return certainty is marginally better with FMPs. Since bonds are held without any reinvestment, the yield you see at launch is very close to what you get at maturity. There is no drift from buying and selling bonds along the way.
FMPs also shield you from your own behavior. Because you cannot easily redeem, you are forced to stay invested until maturity. For people who panic during rate movements, this lock-in works as forced discipline.
- Purest form of buy-and-hold in debt funds
- No mark-to-market volatility if held to maturity
- Suitable for matching a known future expense with a specific date
The Verdict — Which Is More Predictable?
FMPs are technically more predictable by a thin margin. No bonds are traded during the tenure. What you lock in is what you get. But the difference in predictability is small. A TMF held to maturity gives you returns within 0.1 to 0.3 percent of the initial yield indication.
For most investors, Target Maturity Funds are the better choice. You get nearly identical predictability with far superior liquidity. The ability to exit without penalty is worth the tiny trade-off in return certainty.
FMPs make sense only when you are absolutely sure you will not need the money before maturity and you find an FMP with yields notably higher than available TMFs. That situation is becoming increasingly rare.
Since April 2023, both products are taxed at your income slab rate. The old indexation benefit that made FMPs attractive for three-year holdings no longer exists. This change removed the last major reason many investors preferred FMPs over TMFs.
If you want a debt mutual fund with predictable returns and the freedom to walk away when needed, pick a Target Maturity Fund. Match the fund's maturity date with your financial goal. Hold until the end. You will know your approximate return from day one, and you will never be stuck waiting for a buyer who may never show up.
Frequently Asked Questions
- Are Target Maturity Funds safe?
- TMFs that invest in government bonds and SDLs carry very low credit risk. The government backing means default is extremely unlikely. However, if you sell before maturity, you may see short-term price fluctuations due to interest rate changes.
- Can I do SIP in a Target Maturity Fund?
- Some fund houses offer SIP options in TMF direct plan variants. ETF-based TMFs do not support SIP directly, but you can buy units on the exchange at regular intervals manually.
- Why did FMPs lose popularity after 2023?
- The 2023 tax change removed indexation benefit for debt funds held over three years. FMPs were popular largely because of this tax advantage. Without it, their illiquidity became a disadvantage with no compensating benefit.
- What happens when a Target Maturity Fund reaches its maturity date?
- The fund house redeems all remaining units and returns the proceeds to investors. The fund ceases to exist after maturity. You receive the final NAV-based value in your bank account.