What is YTM (Yield to Maturity) in Debt Mutual Funds? Formula and How to Read It

Yield to Maturity (YTM) is the “annualised return” you can potentially expect from a debt mutual fund if the fund holds all its current bonds and other debt securities till maturity, there are no defaults, and coupons are reinvested at similar yields. 

For a debt fund, the YTM shown in factsheets is the “weighted average” YTM of all securities in the portfolio. 

A debt mutual fund may invest in multiple bonds and debt securities. Every bond can carry a different coupon rate, market price, maturity, and yield. 

• So, when each security offers a different return profile, how is the yield shown for the entire portfolio calculated? 

The Yield to Maturity indicated in the factsheets of a debt scheme is the weighted average YTM of the individual bonds and debt securities held in the portfolio. But what is YTM? 

Read this to learn what is YTM in bonds and debt mutual funds, how it is calculated, and how individual security yields contribute to a fund’s portfolio YTM.

YTM represents an “estimate” of the annual return that the bonds currently held by a debt mutual fund could generate if those bonds are held until their respective maturity dates. Additionally, YTM also makes these three different assumptions:

• The issuer does not default
• The bonds are held until maturity, and 
• The interest (coupon) received is reinvested at the same rate.

Note: YTM only gives an indication of the return potential of the fund’s existing debt portfolio. It is not the actual return an investor is guaranteed to receive.

Usually, a debt mutual fund holds many bonds and other debt securities, each with a different YTM and investment value. In India, SEBI-registered debt schemes disclose portfolio YTM in their monthly fact sheets.

The YTM shown in the fund’s factsheet is calculated as a “weighted average” of the YTMs of all securities in the portfolio. Consequently, securities that represent a larger portion of the portfolio have a greater influence on the fund’s overall YTM. 

For example, consider a debt mutual fund with the following portfolio:

• 80% of the portfolio is invested in bonds with a YTM of 7%.

and

• 20% of the portfolio is invested in bonds with a YTM of 9%.

Since a larger portion of the fund is invested in securities yielding 7%, these securities have a greater impact on the overall portfolio YTM. The fund’s weighted average YTM would therefore be around 7.40% [(80% x 7%) + (20% x 9%)).

For a single bond, YTM is the internal rate of return (IRR) that equates:

• The bond’s current market price, with
• The present value of all future cash flows (coupons + principal at maturity).

Yield to Maturity considers both the interest income received from a bond and the gain or loss arising from its purchase price compared with its face value at maturity. The exact YTM calculation involves an “iterative process” because it considers the timing and present value of multiple future cash flows. 

However, a commonly used approximation or Yield to Maturity formula is:

Where,

• C = Annual coupon payment
• F = Face value of the bond
• P = Current market price of the bond
• n = Number of years remaining until maturity

For more clarity, let’s study an example.

Example (Calculating Yield To Maturity of a Bond)

Suppose a debt mutual fund scheme has a bond in its portfolio with the following details:

• Face value (F) = ₹1,000
• Coupon rate = 8%
• Annual coupon payment (C) = ₹80
• Current market price (P) = ₹950
• Years to maturity (n) = 5 years

Using the Yield to Maturity formula:

The bond pays an 8% coupon, but the investor is purchasing it for ₹950 rather than its ₹1,000 face value. If the bond is held until maturity and the issuer repays ₹1,000, there is a ₹50 gain in addition to the annual ₹80 coupon payments.

The Yield to Maturity formula spreads this ₹50 difference across the remaining five years, which gives an approximate ₹10 annual price gain. It then combines this with the ₹80 annual coupon to arrive at ₹90 of annualised return. 

If we talk about the “denominator” of ₹975, it represents the average of the ₹950 purchase price and ₹1,000 face value. Therefore, the approximate YTM is 9.23%, which is higher than the 8% coupon rate because the bond was purchased below its face value. 

If a bond is purchased above its face value, the opposite can occur. The Yield to Maturity can be lower than its coupon rate because the investor may incur a loss as the bond's value moves towards its face value at maturity.

A bond can show different percentages depending on what is being measured. The coupon rate indicates how much interest the bond pays on its face value. In contrast, the current yield relates that interest to the bond’s current market price.

Now, Yield to Maturity goes a step further by considering both the interest income and the gain or loss that may arise if the bond is held until maturity. For a better understanding, let’s check out a detailed comparison between these three return metrics:

If we continue with the above example, where the Yield to Maturity was calculated as 9.23%, in it, the 

• Coupon rate is 8% coupon

and

• Current Yield is approximately 

So now you know what Yield to Maturity (YTM) is and how it is calculated. For a debt mutual fund, the YTM represents the “weighted average YTM” of the individual bonds and other debt securities held in its portfolio.

To calculate the YTM of a single bond, an Internal Rate of Return (IRR) is calculated using a discount rate at which the present value of all expected future cash flows (including coupon payments + the principal repayment at maturity) equals the bond’s current market price. 

Note that the Yield to Maturity is different from both the coupon rate and the current yield. The coupon rate is based on the bond’s face value, while current yield compares its annual coupon with its current market price. YTM goes further by incorporating coupon income, the price gain or loss at maturity, and the remaining time to maturity.

For more information, you can visit www.tatamutualfund.com/deshkarenivesh. The Investor Service Centre of Tata Asset Management Pvt. Ltd. is located at Mulla House, Ground Floor, 51, M.G. Road, Near Flora Fountain, Mumbai – 400 001, Maharashtra. The office hours are Monday to Friday, 9:00 AM to 5:30 PM. For assistance, you can also call (022) 6282 7777 from Monday to Saturday, 9:00 AM to 5:30 PM, or email service@tataamc.com

1. Is YTM a Guaranteed Return for a Debt Mutual Fund?

No, YTM only represents the yield of the debt securities currently held by the fund, based on the following assumptions:

• The fund will hold the securities until maturity
• There will be no defaults, and 
• The debt fund reinvests coupon payments at similar yields

Since a mutual fund’s portfolio can change and the market value of its securities can fluctuate, the fund’s actual return can differ from its stated YTM.

Additionally, changes in interest rates, bond prices, credit quality, and portfolio composition can all influence the fund’s NAV and, consequently, the return earned by investors. 

2. Can the Yield to Maturity of a debt mutual fund change after investing?

Yes, a fund’s YTM can change as the portfolio composition, market interest rates, and prices of the underlying debt securities change. 

Fund managers may also buy or sell securities, altering the portfolio’s weighted average YTM. Therefore, the YTM shown when investing is not fixed for the entire investment period.

3. Is YTM the same as the interest rate earned by a debt mutual fund?

No, YTM is different from the coupon or interest rate of individual bonds. It considers the securities’ coupon income, market prices, and remaining maturity. 

For a debt mutual fund, the reported YTM is the weighted average YTM of the securities currently held in the portfolio.

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