Why have Target Maturity Funds (TMFs) increasingly gained popularity over traditional Fixed Maturity Plans (FMPs) for investors seeking predictable debt returns?

[ A ]TMFs guarantee an absolute 25% annual return backed by the World Bank, while FMPs always lose money.

[ B ]TMFs are open-ended index-based funds offering seamless subscription and redemption at daily NAV with high credit quality (G-Sec/SDL/AAA PSU), whereas FMPs are illiquid close-ended funds.[ CORRECT ]

[ C ]FMPs invest 100% in speculative small-cap equities, while TMFs hold only physical gold bullion.

[ D ]TMFs are completely exempt from all income taxes under Section 123 (the erstwhile Section 80C) up to Rs. 50 lakhs per year.

Takeaway

Option B is correct: TMFs are open-ended index-based funds offering seamless subscription and redemption at daily NAV with high credit quality (G-Sec/SDL/AAA PSU), whereas FMPs are illiquid close-ended funds.

Derivation

Target Maturity Funds (TMFs) and Fixed Maturity Plans (FMPs) both align portfolio bond maturities to a target date, minimizing reinvestment risk and providing predictable yields. However, while FMPs are close-ended (locking capital until maturity with illiquid exchange trading), TMFs are open-ended (or ETFs) tracking G-Sec/SDL/AAA PSU debt indices, allowing investors to subscribe or redeem directly with the AMC at daily NAV. TMFs combine yield predictability, top-tier credit safety, and superior liquidity. This tests modern debt scheme selection. The common error is thinking TMFs provide guaranteed returns.

Why the others fail

A — TMFs guarantee an absolute 25% annual return backed by the World Bank, while FMPs always lose money.

Neither TMFs nor FMPs offer guaranteed returns; yields are market-linked based on portfolio debt instruments held.

C — FMPs invest 100% in speculative small-cap equities, while TMFs hold only physical gold bullion.

Both FMPs and TMFs are fixed-income debt products holding bonds, not speculative equity or physical gold bullion funds.

D — TMFs are completely exempt from all income taxes under Section 123 (the erstwhile Section 80C) up to Rs. 50 lakhs per year.

TMFs are taxed under standard debt mutual fund provisions at marginal slab rates and do not qualify for Rs. 50 lakh Section 123 exemptions (the erstwhile Section 80C).