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Defined Maturity Funds (DMFs) are an innovative way to invest in municipal bonds. Like Fidelity's other municipal bond funds, DMFs offer professional management, diversification, and seek to provide federally tax-exempt monthly income. They can also be sold at the end of each business day at their net asset value.
Unlike traditional bond funds, a DMF's price sensitivity to changes in interest rates declines gradually over time, approaching zero near its target end date. Furthermore, the fund is designed to distribute its net asset value to shareholders in cash shortly after the fund's end date.
A DMF invests primarily in investment-grade municipal bonds whose maturities are roughly the same as the end date of the fund itself. As these bonds move toward maturity, the fund's overall interest rate sensitivity gradually declines since bonds with shorter maturities tend to be less sensitive to interest rate changes. This feature may make DMFs an attractive option for investors with specific time horizons. To take advantage of this expected decline in price sensitivity, investors should consider holding the funds to their end dates. Otherwise they may experience more price, or net asset value uncertainty.
A DMF aims to distribute monthly dividends that are exempt from federal income tax. Investors have the option of reinvesting those dividends or receiving them as income. The fund also distributes its net asset value to shareholders in July of the year it reaches its end date.
Save for a goal
While DMFs do not guarantee a predetermined amount at the fund's end date, they can be a great way to save for future expenses. For instance, you can buy a DMF or a series of DMFs with end dates that coincide with your goal.
Help manage the impact of rising rates
Purchasing multiple DMFs with different end dates can be an effective way to create a fixed income "ladder." For example, if rates are rising, you can reinvest the proceeds of a fund that will be distributing its assets to shareholders into a fund with a higher yield.
Supplement bonds1
If you purchase individual bonds, you may consider adding a DMF to your existing ladder or asset mix to help increase diversification and improve overall liquidity.
