Bank fixed deposits may soon become an outdated mode of investment as this new form of debt mutual fund can give predictable returns with low risk. 

 

Target-maturity debt schemes are a new type of debt scheme that take the good features of fixed-maturity plans and open-ended debt schemes. The investor gets a debt scheme whose returns are predictable and which can be exited anytime, in addition to enjoying a lower tax burden on the gains on investment.

 

This type of debt scheme comes with a maturity date and it invests in debt papers that will mature around the same time as the maturity date. Due to this, an investor can roughly predict the approximate returns that he will receive if the investment were held till maturity.

 

There are several target-maturity schemes in the market. We will find out which schemes are offering the best returns.

 

Currently there are 11 such target debt schemes on offer. We have put all of them in the table below. But not all of them are good.

 

 

YTM is yield-to-maturity which is the return an investor should expect to earn if he/she holds the scheme till its maturity date. YTM changes on a daily basis.

 

Target debt schemes should be compared to bank fixed-deposits for a fair comparison. Secondly, it does not make sense to invest in these schemes for less than 3 years. This is because the gains made within 3 years are taxed at the highest applicable slab rate. Once 3 years are completed, the gains become long-term and are taxed favorably with indexation benefit.

 

Lastly, it does not make sense to currently invest in debt schemes which will mature far away in the future. They are ideal for investing only if the investor is okay with the yield on offer or when the interest rates have topped and expected to fall.

 

Therefore, the ideal schemes are those that will mature in 3 to 5 years. There are four such schemes in the table above. They are offering yields of 5.43% to 5.93%. If the scheme is able to meet this yield, then the post-tax return could be around 5% to 5.50%.

 

Now this may seem less, but as said above, the schemes should be compared against bank fixed deposits. HDFC Bank is offering 5.30% quarterly compounding interest rate per annum for 3-5-year period.

 

The post-tax return for the highest tax bracket would drop to around 4%. If you are in the 20% tax bracket, you may earn up to 4.50%. This is less compared to the debt schemes mentioned above that would give higher post-tax returns and the investment would be in government-owned companies and state government loans.

 

Investing in target maturity debt schemes gives all the benefits found in other debt schemes. You can liquidate the investment anytime, or even take a loan against the units. Unlike bank fixed deposits, there is no tax deducted at source in these schemes nor do you have to pay taxes annually on the accrued interest.

 

The attractiveness of these schemes will only increase in the coming months as we see interest rates rise further. Investors wanting to buy these scheme units should check out the latest yield-to-maturity (YTM) of the scheme to know the expected returns from the investment if it were held to maturity.

 

The YTM data can be found in the factsheet of the schemes at the fund house website or even on online mutual fund databases.