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What is Yield to Maturity in Mutual Funds?​​

Yield to Maturity (YTM) is the expected return an investor would earn if he/she holds the bond until its maturity. For example, if a bond’s face value is Rs 1000, maturity is 5 years, and coupon is 8%, it implies that if you were to hold the bond for 5 years, then you shall get Rs 80 per year as interest till the 5th year, after which you shall get your principal amount back. At face value, when the bond is first issued, the coupon rate and the yield are the same. While coupon rate, in this case, remains fixed throughout the tenure of the bond. Yields and bond price move in the opposite direction. When bond yields go up, prices go down, and when bond yields go down, prices go up.

Coupon Rate Vs YTM Vs Current Yield

Before we move further, let us understand that when you purchase a bond, there are three things that are fixed, given below with examples-

1.Face Value- Rs 1000

2.Coupon Rate- 8%

3.Maturity Period- 5 years

Yields can be measured in multiple ways, out of which 3 most common measures are-

If there are no changes in the market price of the bonds, interest rates or other external factors that affect a bond’s price, the coupon rate and the current yield will be the same as the YTM. Having said that, the face value at which you bought the bond in the above example is Rs 1000, but the market price of the bond may fluctuate due to rise and fall of the interest rates in the economy, credit risks, demand for the bond, etc.

Taking the same example further, suppose the market price of the bond drops to Rs 950 (discounted rate). With your coupon remaining constant at Rs 80 per year, the current yield becomes= Rs 80/ Rs 950 %= 8.421%.

Similarly, if the market price of the bond becomes Rs 1050 (premium), your current yield will be Rs 80/ Rs 1050 %= 7.619%

Hence, you can see that the current yield is the return at any given time basis the prevailing market price of the bond. When a bond is purchased at face value (Rs 1000 in this case), the current yield is the same as the coupon rate, which in turn is the same as the YTM. But as the market conditions change, the three begin to differ.

Now, if an investor buys this bond at a discounted rate of Rs 950, he will still get Rs 1000 at the time of maturity, thereby increasing his overall yield. This comprehensive yield, which is a relatively better metric to measure the yield, is called YTM.

YTM of a debt mutual fund scheme

YTM minus expense of a debt scheme is the approximate return an investor can expect if ALL the bonds and the other securities in the scheme are held till maturity. It can also be defined as the weighted average of the yields of all the underlying securities in the proportion of the holding. YTM of a debt scheme may not be constant because the debt schemes are actively managed, and the fund manager may change the fund’s portfolio as per the market conditions.

Hence, YTM minus expense can be a rough indicator of how much return an investor can expect if all the securities are held till maturity, but the returns may vary due to interest rates and changes in the portfolio. Reason for your debt scheme showing high YTM can be that the debt mutual fund scheme you are investing in might be taking higher risks. The market price of the bond and its yield are inversely related. If there is a fall in the market price, it pushes the YTM upward

When deciding on a scheme, the investor is advised to look at the YTM in tandem with the underlying portfolio because a high YTM may not mean high return or a good fitment in your portfolio.

Sources-
https://www.youtube.com/watch?v=ppXV3HTB6HEhttps://www.youtube.com/watch?v=2AkCtX71wWwhttps://www.morningstar.in/posts/33364/what-is-yield.aspx#:~:text=The%20current%20yield%20would%20be,including%20interest%20earned%20on%20interest.https://www.livemint.com/mutual-fund/mf-news/high-ytm-in-your-debt-mutual-funds-may-be-a-red-flag-to-watch-out-for-11588508261523.htmlhttps://thismatter.com/money/bonds/bond-yields.htmhttps://www.mutualfundssahihai.com/en/node/174#:~:text=Yield%2Dto%2Dmaturity%20is%20the,at%20maturity)%20at%20this%20rate.
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Disclaimer:
This is an investor education and awareness initiative by Nippon India Mutual Fund.
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

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