Blue Water Capital Management
Blue Water Capital Management

  (919) 589-2528

Specializing in retirement planning and personalized investment management.

Target Maturity Bond Funds

Target Maturity Bond FundsA Target Maturity bond fund, sometimes called a “Defined-Maturity bond fund”, holds a collection of bonds with similar maturity dates. These bonds are generally held until maturity. A “2027” fund usually holds 150-400 bonds that mature between July 1, 2027 and December 15, 2027. Around December 15, 2027, the fund pays out all of its money and closes. In theory, you are paid back your “principal” and earn interest along the way. “Principal” is in quotes because it is not guaranteed. An individual bond may go bust and/or the fund’s management fees (which all funds have) may reduce the amount you receive when the fund closes.

You can find Target Maturity Bond funds in a number of maturities (1-10 years) and bond asset classes such as:

  • Investment Grade Corporates
  • High Yield
  • TIPs
  • Municipals

Pros:

  • Less interest rate risk than traditional bond funds 
    • Since these funds hold their bonds until maturity, you don’t have to worry about rising interest rates decreasing the value of your investment (unless you sell before maturity).
  • More diversification than holding a few individual bonds
    • These funds typically hold 150-400 individual bonds.
  • Flexibility
    • With a fund that matures every year, you can target the yield/maturity you want, or you can buy multiple funds with staggered maturities like a bond ladder.
    • Can be used in asset-liability management
  • Better liquidity than individual bonds
  • Better yield than money markets and most CDs with similar maturity dates

Cons:

  • The management fee (0.10% - 0.50%) may reduce the principal you receive back at maturity
    • Individual bonds do not have a management fee, but individuals often pay a higher spread to buy smaller lots ($25K - $50K) vs. institutional pricing.
  • If the fund is not held to maturity, your investment will be more affected by interest rate movements
    • This is also true of individual bonds too.
  • Not as customizable as individual bonds
    • With individual bonds you can select bonds with the specific credit rating and maturity (by month) you are looking for.

Potential uses:

  • Protect against rising interest rates
  • Build bond ladders
  • Plan for future known expenses and liabilities by matching needs with bond fund maturities.