How To Calculate Yield To Maturity In Mutual Funds?

Yield to Maturity (YTM) is the annual rate of return that an investor can expect to earn if they hold the bond till its maturity. As debt mutual fund investments are made in numerous bonds, the yield is the weighted average of YTM of all the bonds in the fund. YTM considers the reinvestment of all the payments made by the bond until maturity.

How to calculate Yield to Maturity?

The face value of the bond becomes the determining factor for the coupon payments until maturity. A coupon payment is the annual rate of interest on the face value of the bond paid to the bondholder. The coupon rate of the bond remains fixed, but the price and YTM fluctuate.

When the rate of returns in the stock market increases than the bond’s coupon rate, the bond becomes less attractive, and the bond’s price falls. In contrast, if the interest rate in the market falls lower than the bond’s coupon rate, the bond becomes more attractive, and the price rises.

Formula

Approx. YTM = Coupon (Face value – market price / Number of years to maturity) / (Face value + market price) / 2

YTM considers reinvestment of the coupon payments and hence calculates the overall yield till maturity.

The significance of calculating YTM for an investor

The calculation of yield to maturity enables you as an investor to compare securities based on their expected return. Even if the bonds have different maturity periods, a comparison can be made. It also helps you to understand how market conditions can affect the yield of the bond.

YTM and its importance while taking investment decisions

Yield to Maturity (YTM) is the annual rate that you as an investor can expect from your investment. It acts as a parameter to decide whether an investment is good and whether it can be invested in. Yield to maturity also indicates the credit risk and liquidity risk linked with the bond.

However, with that being said, there are various factors to consider before you decide to invest in mutual funds, particularly debt mutual funds. To ensure that your investments are in the right places, it is always prudent to seek the help of a financial advisor, who can suggest investment options that are based on your goals and risk appetite and share expert advice on how much, where and when to invest in.