Yield To Maturity (YTM)
YTM is the indicator of potential returns from a Debt Fund. Simply put, it is defined as the Total Rate of Return earned by a bond when it makes all interest payments & repays the original principal.
Ok, but what do I do then?
Bonds with low Credit Ratings carry a higher level of Liquidity Risk and Credit Risk.
A clear understanding of YTM can help you make an educated choice regarding whether a particular Debt Fund is a suitable investment for you.
Here’s how you can understand the risk profile of your debt investments.
Yield To Maturity is only an indicator of returns for Debt Funds, which may vary with changes in market conditions.
In a Debt Mutual fund, the fund manager invests in numerous Bonds with varying YTMs depending on the portfolio’s strategy. A change in the YTM of a single Bond will lead to some change in the YTM of the entire Fund as a whole. However, the extent of this YTM change for the fund will depend on the weightage of the individual Bond in the Debt Fund’s portfolio.
However, YTM by itself does not portray the complete risk profile of a Debt Fund and you may need to consider other risk metrics such as Average Maturity, Macaulay Duration, and Modified Duration and most importantly, the quality of the underlying holdings, to understand the risks associated with your Debt investments.