Debt funds are mutual fund schemes that invest in fixed-income instruments. These instruments usually have a low-cost structure, high liquidity and stable returns. They are considered less risky than equity-based funds due to their less volatile nature. This is why they are considered a good investment option for those with a low-risk appetite.
This type of mutual fund is also popular because it brings stability to an investment portfolio, while being highly liquid. In addition, there are no tax or TDS deductions on the earnings. The top debt funds tend to offer better ROI than other low-risk investments, such as like fixed deposits and recurring deposits. Also, they come with lower transaction costs than other mutual funds. However, to choose the best mutual fund to invest in, you should know the yield to maturity rate of the fund. Yield to Maturity in Debt Funds Yield to maturity (YTM) in debt funds is the total expected return an investor earns at the end of the maturity period. It is expressed as an annual rate. For example, if an investor holds ₹1,00,000 in a debt fund for 5 years at an expected interest rate of 10%, it means that they will earn ₹10,000 per year. After 5 years, they will get back the total interest earned along with the principal amount, minus the expenses associated with the debt scheme. The yield to maturity rate tells you what this amount is likely to be. Calculating Yield to Maturity The below formula is used to calculate the YTM of debt mutual funds: YTM = Yield to Maturity Annual Interest = Interest payout by the bond Face Value = The price at which the bond was issued Price = Bond’s current market price Maturity = Number of years till bond’s maturity YTM Keeps Changing With changes in market conditions, the yield to maturity also changes as it is an indicator of returns. Debt funds invest in multiple types of bonds. Even if the market condition of any single bond changes, it could affect the complete debt fund. The intensity of the impact will depend on the weightage of the individual bond in the portfolio. Why Calculate YTM?
Although YTM is calculated through assumptions and estimation, it can still help investors make an informed investment decision.
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