The role target maturity bond funds can play in a balanced portfolio

As their name suggests, the primary difference between a target maturity bond fund and a traditional bond fund is the set maturity date on which you can expect to receive full return of your investment capital, plus interest income paid throughout your holding period and capital gains. A traditional bond portfolio doesn’t have a terminal date. The fund manager is continuously buying and selling bonds in keeping with the fund’s mandate.

With a target maturity bond fund, the manager buys and holds the bonds in the fund to maturity. This means you can select the target maturity bond fund with the maturity date that best coincides with when you’ll need to have cash at the ready. For example, at the time this article was written, CIBC was offering target maturity bond funds with termination dates in 2025, 2026, 2027, 2028, 2029, and 2030. When the fund reaches its termination date, all of the bonds it contained will have matured and the fund will hold nothing but cash. The fund is closed and investors paid out.

For long-term growth and capital and wealth accumulation, traditional bond funds will always play a key role in a 60% equity, 40% fixed income investment portfolio. They’re tried and true. So, target maturity bond funds aren’t meant to replace traditional bond funds so much as they can complement them to meet short-term investment objectives. What’s more, they’re not just useful for upcoming purchases. Because you have multiple maturities to choose from, you can match any of your near-term liabilities with the corresponding target maturity bond fund to have cash on hand when it’s required.

However, as with all investments, target maturity bond funds have a number of caveats investors should keep in mind, such as mark-to-market risk. Because these funds typically invest in bonds that are traded daily, their prices change daily based on market conditions. So just like any other mutual fund, the net asset value of the fund will fluctuate based on the pricing of the underlying bonds. This won’t be surprising to a traditional bond investor, but it could be for GIC(guaranteed investment certificate) investors new to target maturity bond funds.

Compared to other cash-like savings instruments — such as GICs or high-interest savings accounts (HISAs) — a target maturity bond fund offers the potential for additional yield. Generally speaking, this is accomplished by the use of investment-grade bonds from corporate issuers that are not guaranteed.

That’s why it’s important to focus on funds guided by managers with credit research expertise and sector analysts who specialize in looking at the issuers in each of the sectors that are going to populate their funds. Doing so gives you the peace of mind of knowing those risks are being looked at independently and are constantly assessed for each new portfolio holding. This way, when your portfolio manager buys bonds for a target maturity bond fund, you know they’re comfortable and confident with holding those bonds to their maturity dates.

CIBC Asset Management is committed to providing market and investment insights and research. We want to help you find the right solutions to guide your investment journey. If you have questions about the fixed income investments in your portfolio, get in touch with your advisor or CIBC representative anytime.