About Yield to Maturity

Yield to maturity (YTM) refers to the rate of return anticipated on a bond if it is held until the date of maturity of the bond.

It can be interpreted as the expected annualised returns provided that -

• the bond is held to maturity

• the bond issuer does not default and

• the coupons are reinvested at the same rate

The computation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity.

Yield from the fund is the weighted average of the yields on different securities, weighted by the proportion of sum invested in the fund (as a fund invests in bonds of varying maturities and yields).

This weighted average yield gives an indication of the attractiveness of the underlying bonds invested by the fund. However, interest rate risks, possible defaults and reinvestment risks would affect the returns of a debt fund. In addition, fund managers may not hold bonds to maturity. Therefore, investors should not interpret the weighted YTM of a debt fund as a forecast or projection of returns for the fund.

About Duration

Duration in simple terms tells us how sensitive the bond’s price is to interest rate changes. The duration of a bond is always denoted in years i.e., the xyz bond has a duration of let us say 3 years. So, if a bond has a longer duration (higher value) then, a small change in interest rates can lead to large change in the bond prices or vice versa.

Generally, GILTs have longer duration than most debt instruments and hence, are more prone to price fluctuations when interest rates are changed. Short-term debt instruments and money market instruments have duration in months or days and are less prone to price fluctuations when interest rates are changed. So, liquid funds and short-term funds have a lower impact of interest rate change and long-term GILT funds generally bear severe impact of interest rate changes.

As a fund invests in bonds of different maturities, yields and durations, the duration of the fund will be the weighted average of the yield on different securities, weighted by the proportion of invested sum. This weighted average duration gives an indication on the sensitiveness of that fund to interest rate changes.

Disclaimer on using Yield to Maturity

YTM does not represent and should not be taken as the historical, expected or actual returns on an investment if it is mentioned in any debt mutual fund. Further, it is not a forecast or projected yield and is not indicative of the future or likely performance of any debt funds. The YTM on a debt fund is not equivalent to and cannot be compared with the yield on bonds that are held to maturity.

This information is intended for reference only and does not constitute investment advice or a recommendation or an offer or solicitation, and is not the basis for any contract to purchase or sell any security or other instrument, or for the relevant fund manager or its affiliates to enter into or arrange any type of transaction as a consequence of any information contained.

All applications for investments must be made on the application form accompanying the scheme information document/ statement of additional information, which can be obtained from the relevant fund manager or its approved distributors.

In the event that an investor chooses not to seek advice from a financial adviser, the investor should consider whether the mutual fund(s) is suitable for him.