Guide · Bonds and debt funds · Updated 2026-09-23

A target maturity fund pins an approximate outcome for the holder who reaches its date, and leaves anyone who exits earlier holding an ordinary bet on yields

The usual description, that a target maturity fund held to maturity delivers the yield it showed on the day it was bought, describes one path through the product. It is roughly right on that path and wrong off it, and the gap between the two paths is a mechanism that can be derived in a few lines and then measured on the exchange's own index files.

Every measured figure below comes from those files: daily closing levels of five target maturity indices of AAA rated public sector bonds, one of which matured on 15 April 2025 inside the sample, and of the constant maturity government bond indices published alongside them. The files carry index levels, not yields, which limits what can be measured, and each limit is stated where it bites.

The date belongs to the bonds, and the fund inherits it

The index behind a target maturity fund holds only bonds that mature inside a window ending on its date. NSE Indices builds its public sector series from AAA rated bonds of government owned issuers maturing during the twelve months before the index maturity date, weights them by amount outstanding with a 15 per cent cap on any one issuer, reconstitutes them at the end of every calendar quarter, and reinvests each coupon in the portfolio on the day it is paid, in proportion to the existing weights (its fixed income methodology document, August 2026 edition). A fund tracking such an index inherits the date because it may hold nothing that outlives it: under paragraph 4.4.5(g) of SEBI's Master Circular for Mutual Funds of 20 March 2026, no security in the portfolio may have a residual maturity beyond the fund's target maturity date.

Duration then falls with the calendar, because every remaining cash flow gets closer. The Macaulay duration of a zero coupon bond is its maturity, so it falls by exactly a year each year; a coupon bond's falls more slowly on average, because it starts below the maturity and still reaches zero on the same date. A constant maturity fund does the opposite on purpose. It sells bonds as they shorten and buys longer ones, and an index fund on a constant maturity index must hold securities within 10 per cent of the index's maturity range (paragraph 4.4.6(c)), so its duration stays where the mandate puts it.

The whole difference between the two products is in that picture. The holder of the constant maturity fund carries the same rate sensitivity on every day of ownership. The holder of the target maturity fund carries less each year and none on the date. Leaving early means selling whatever duration is left at that day's yield, which is exactly what the constant maturity fund's holder does whenever they sell.

The duration band is what keeps a fund on its index's shrinking duration, and it tightens from six months to three once five years remain. The 1.25 per cent figure is a trigger rather than a cap on cost: an average annualised tracking difference above it over a year must be reported to the trustees with the corrective action taken.

Since 26 February 2026, a year in a fund's name no longer means a bond portfolio

SEBI's circular HO/24/13/15(2)2026-IMD-RAC4/I/5764/2026 of 26 February 2026 replaced the scheme categories of 2017 and added a group that did not exist before: Life Cycle Funds, open ended funds with a target date maturity that follow a glide path across equity, debt, InvITs, gold and silver ETFs and exchange traded commodity derivatives. They must put the maturity year in the name, as in Life Cycle Fund 2045, and run five to thirty years in steps of five, with no more than six open for subscription at any one fund house.

The name is where the resemblance ends. The same circular files target maturity debt funds under other schemes, as index funds and ETFs holding at least 95 per cent of assets in their index's securities. A Life Cycle Fund must still hold 5 to 20 per cent in equity in its final year, charges an exit load on any exit in its first three years, and may be merged into the nearest maturity Life Cycle Fund inside its last year with the positive consent of unitholders. Its yield on any day binds nothing about its outcome.

A page on target maturity funds written before February 2026 could treat a year in the name as shorthand for a dated bond portfolio, because it was one. Now it can be either of two unrelated products, and the scheme information document, not the name, says which; existing schemes had six months from the circular to bring names and objectives into line. The plumbing moved too: the Master Circular of 20 March 2026 replaced the June 2024 edition from 1 April 2026, the day the SEBI (Mutual Funds) Regulations, 2026 came into force, so older paragraph references for these rules point at superseded text.

The roll-down, derived, and why it adds nothing for a holder to the date

Take a zero coupon bond with T years left, priced at a yield y that depends on T through the curve. With continuous compounding, which keeps the algebra clean, its log price is −yT. Over a short interval two things change: T falls by the length of the interval, and the yield changes, partly because the market moves and partly because the bond is now shorter and sits at a different point on the same curve.

Differentiate, and the return over a short interval h splits into three terms: return ≈ y × h + T × s × h − T × Δy, where s is the slope of the curve at the bond's maturity, the yield given up per year of maturity lost, and Δy is the market's change in the yield over the interval. The first term is the carry, the yield itself. The second is the roll-down. The third is the duration bet. For a coupon bond or a portfolio, modified duration takes the place of T in the last two terms, and convexity adds a small positive term for large moves (the duration and convexity arithmetic).

The roll-down is the price gain from ageing. On an upward sloping curve, a bond a year older is priced at a lower yield than it was bought at even if the curve has not moved, and a lower yield is a higher price. On the illustrative curve below, a five year bond yielding 6.90 per cent becomes, a year later, a four year bond priced at 6.78; the fall of 0.12 of a percentage point, acting on about four years of duration, adds roughly half a point to that year's return.

Now follow the bond to the end. Its log price starts at −y₀T₀ and finishes at zero, because it repays at par whatever the curve did in between. The total return to the date is therefore y₀T₀: the yield at purchase, for the whole life, and nothing else. The roll-down has not vanished; it has been spent. On an unchanged curve the early years collect it on top of the yield, and the late years, when the bond sits on the flatter short end, earn less than the yield by exactly enough to bring the total back.

Two consequences follow, and most descriptions of roll-down state neither. For a holder to the date, roll-down is a timing effect that front loads the return without adding to it. For a holder who sells after the first year it is real extra return over the entry yield, but only in the scenario where the curve holds still, and that is a scenario rather than an expectation. The one year return on an unchanged curve equals the forward rate the curve implies for the bond's final year (the yield curve read as a list of forward prices), and a forward rate is a break-even, not a forecast.

Measured: the price risk shrinks with the remaining life, and a daily chart hides more than half of it

The five indices make the test direct. They mature on 15 April 2025, 15 April 2030, 2031 and 2032, and 18 April 2033, and first appear in the exchange's daily all index file on 16 January 2025, where the sample starts, so the first of them matured inside it.

A bond index earns interest on every calendar day, so a Monday close carries three days of accrual and a raw daily change mixes income with price. Each index's moves are therefore measured net of a drift fitted per calendar day, which leaves the price noise. Over the 59 sessions from 17 January 2025 to 15 April 2025, the index maturing on the last of them moved 0.51 basis points a session, and 0.38 once its single largest move, on 2 April 2025, is set aside. On the same sessions the four longer indices moved 10.0 to 12.5 basis points, 20 to 24 times as much, with remaining lives of 5.1 to 8.1 years against its 0.1.

Quarter by quarter, the ordering holds while the level moves with the market. The shortest of the four long indices, the 2030 one, moved least in all seven calendar quarters of the sample, and in four of them the four lined up exactly by remaining life.

Two measured findings sit under that table, and neither appears in the usual account. The first is that a daily chart understates a public sector bond index's sensitivity to rates. Regressed on the composite government bond index, the four indices' daily moves respond by only 0.24 to 0.30, with correlations of 0.34 to 0.50, and not in order of remaining life. On non-overlapping monthly moves the responses rise to 0.64, 0.73, 0.81 and 0.86, exactly in order of remaining life, with correlations near 0.9. Each long index's monthly variance is 2.5 to 2.9 times what its daily variance implies, against 1.8 for the four to eight year government index: the public sector indices take several sessions to absorb a rate move that government bonds absorb at once, which is what prices set by a daily valuation, rather than by continuous trading, would produce; NSE Indices takes its bond valuations from NSE Data and Analytics.

The second is a null result, reported because it was expected. Within any one index across these twenty months, the loss of about a year and a half of remaining life does not show as a falling sensitivity. The 2030 index's response to the government index, measured on overlapping monthly moves, was 0.58 in the first half of 2025, 0.33 in the second half and 0.62 from January 2026. A cut of about 30 per cent in remaining life is smaller than the half year swings in how public sector bond prices moved against government bonds, so one index's own history cannot see it. The cross section, where every index faces the same market on the same day, and the final quarter of the matured index, where the remaining life ran out, both can.

Measured: only the maturity pins the outcome

The matured index allows the cleanest comparison the files offer. Take each session from 16 January 2025 to 13 March 2025, at least a month before the April 2025 index matured, as an entry day, and end every holding on its maturity date, 15 April 2025. The five indices then face identical calendars and differ only in whether the exit day was their own maturity date.

Entered on any of those 41 days, the maturing index returned between 7.46 and 7.63 per cent a year, a band 0.17 of a point wide. The four longer indices returned between 12.8 and 33.3 per cent, in bands 85 to 113 times as wide. Their holders were no worse informed. They held portfolios whose value on the exit day depended on that day's yields, while the maturing index's value that day was the redemption value of bonds that had just been repaid.

The level of the long indices' figures belongs to the period, not to the product. The Reserve Bank cut the policy repo rate from 6.50 to 6.25 per cent in February 2025 and to 6.00 per cent on 9 April, bond prices rose through these weeks, and annualising a holding of one to three months turns a price gain of a point or two into a number in the twenties. In a market where yields rise, the same arithmetic draws the same fan pointing down. The flat line is what the maturity date does.

An early exit is an ordinary duration bet, and the data names which one

Lengthen the holding to one, three, six and twelve months and measure the annualised outcome from every entry day that allows it. Two regularities hold without exception: at every horizon the spread widens with remaining life, and for every index it narrows as the horizon lengthens, because the price move at exit is spread over more months of carry.

The twelve month column answers the question. Entered on each of the 167 sessions from 16 January 2025 to 18 September 2025 and sold a year later, with 4.2 to 3.6 years left at exit, the 2030 index returned 2.46 to 7.64 per cent, median 4.76. The 2033 index, with 7.3 to 6.6 years left at exit, returned 0.14 to 6.71, median 3.69. The constant maturity government indices tell the same story over the same windows. The four to eight year index returned 2.14 to 7.78, and entry day by entry day its one year outcome moved with the 2030 index's at a correlation of 0.96, an average of 0.11 of a point apart; the eight to thirteen year index tracked the 2033 index at 0.96, 0.22 apart. Sold after a year, a target maturity fund delivered what a constant maturity fund of similar duration delivered. That is the sense in which an early exit is an ordinary duration bet: a measured equivalence, not a figure of speech.

Those 167 outcomes are not 167 experiments. Consecutive windows share all but a day of their path, which also flatters the correlations, and together they cover twenty months of one market: a sample holding the rally of 2025, a year in which the policy repo rate was cut four times, to 5.25 per cent by December (RBI monetary policy statements), and a fall in bond prices that bottomed in early April 2026, 1.1 to 1.7 per cent below the four long indices' earlier highs. A longer record of the same kind of bet exists in the government index. Entered on each session from October 2015 to September 2025 and held a year, the four to eight year index returned between −0.26 and 16.76 per cent, with nine outcomes in ten between 1.26 and 14.32. That is the range an early exit from a four to five year target maturity fund was exposed to across a decade of Indian rates, before costs.

The yield at purchase is an estimate with four leaks

For the holder who does reach the date, the yield at purchase is still an estimate, and each gap between it and the outcome has a mechanism of its own.

One. Coupons are reinvested at the day's prices, not at the purchase yield. The index reinvests every coupon in the portfolio on the day it is paid, so each coupon earns whatever the remaining bonds yield then. A yield to maturity silently assumes every coupon earns the yield itself (the reinvestment assumption inside a yield). The table works a five year bond with a 7 per cent coupon bought at par, with the whole curve moving once, straight after purchase, and staying there.

Held to the date, a two point move in either direction shifts the outcome by about a quarter of a point, to between 6.73 and 7.28 per cent, and in the opposite direction to the price effect: falling yields reduce what the coupons earn. Sold after a year, the same moves produce 0.56 to 13.78. The asymmetry is the product. At the purchase yield, interest earned on reinvested coupons supplies only 14.8 per cent of the gain to maturity, so the reinvestment rate has little to act on, while an early exit applies the whole remaining duration to the whole portfolio.

Two. The final year earns money market rates. Because the bonds mature across the last twelve months, the methodology sends each redemption down a waterfall: into the same issuer's longest bond maturing on or before the index date, failing that into the rest of the portfolio, failing that into a treasury bill maturing by the date, and once nothing else is left, into the overnight rate of the clearing corporation's tri-party repo market. The last months earn the short rates of that time (how a treasury bill's yield is quoted), not the entry yield. The matured index's own drift, measured net of price noise, fell from 7.5 per cent a year in January 2025 to 6.9 over its final nine sessions, a stretch that included the April rate cut.

Three. Costs come off every day, and tracking adds or subtracts. An index has no expenses. A fund has a total expense ratio, defined in paragraph 11.2.4 of the Master Circular as the base expense ratio plus brokerage, transaction costs and statutory levies including GST, disclosed scheme by scheme every day and charged inside the NAV. The tracking difference then measures everything that separates the fund's return from its index's, costs included.

Four. An exchange price, and a rating that can change. An ETF is bought and sold on the exchange at a price that can sit above or below its NAV, and a premium paid on entry or a discount taken on an early exit comes straight off the outcome. Paragraph 4.5.3 lets ETF investors redeem directly with the fund house, up to 25 crore and without exit load, only when the units have closed more than 1 per cent below NAV for seven continuous trading days, have had no quotes for three consecutive trading days, or have shown total bids below half a creation unit on average over seven. And AAA is a rating, not a promise: the index removes an issuer downgraded below AAA within 30 calendar days and the fund must rebalance within 30 days, so a downgrade becomes a sale at the lower price rather than a wait for repayment, and a fall below investment grade can be segregated into a side pocket.

Tax: the date changes the timing, not the rate

A target maturity debt fund is a specified mutual fund: under section 50AA of the Income-tax Act 1961, in the definition the Finance (No. 2) Act 2024 substituted for assessment year 2026-27, a fund investing more than 65 per cent of its proceeds in debt and money market instruments. A gain on units acquired on or after 1 April 2023 is short-term however long the units are held and is taxed at the slab rate, and the payout on the maturity date is a redemption taxed the same way. Units bought earlier follow the ordinary rules: long-term after 12 months for listed ETF units and 24 months for index fund units, at 12.5 per cent without indexation on transfers from 23 July 2024. For sales from 1 April 2026 the rule sits in section 76 of the Income-tax Act 2025, and the guide to debt funds after the tax change works through every route and date.

Against the same bonds held directly, the difference is timing. A directly held bond's coupons are taxed as income in each year they arrive (the direct route); a fund in its growth option reinvests them, and nothing is taxed until redemption, when they arrive inside a gain taxed at the same slab rate.

What the date is for

A target maturity fund does one job well: meeting a sum on a known date at an approximately known yield, with a duration that runs down exactly as the need approaches. Used for that job, the price swings in between are irrelevant, because nothing is sold at them. Used to park money that might be needed earlier, it is a duration position with a date printed on it, and the measured one year outcomes above are the honest description of what that position did.

Choosing the maturity is choosing how much duration an unplanned exit would carry. A fund maturing after the need forces a sale at a price nobody can know in advance; one maturing well before it leaves a reinvestment at a rate nobody can know. Matching the two dates is the discipline, and it is the part the product cannot do on the holder's behalf. Reading a debt fund by the dated cash flows it holds, rather than by the year in its name or the yield in its factsheet, is method, and it is the method taught here.