Know about Yield to Maturity (YTM)Many investors who are averse to daily volatility of equity and equity-based instruments, but want better return than PPF or similar other assured return instruments, invest in debt mutual funds. To decide ideal debt mutual fund(s) for individual investor, various factors are taken into consideration. These are: (a) Coupon rate, (b) Yield, (c) Yield To Maturity (YTM), (d) Modified Duration and (e) Weighted Average Maturity (WAM). In this thread we are going to discuss about Yield To Maturity (YTM), a very important factor to chose debt mutual fund.
1. YTM can be defined as the total return which an investor can expect from a bond if it is held till the date of its maturity.
2. YTM is generally expressed as the annualised rate of return, if coupon payments are made on a semi-annual basis, However, YTM can also be calculated on a six-monthly basis.
3. At the time of compounding YTM, it is assumed that all coupon payments are re-invested at the same rate as the bond's present yield.
4. YTM is used as a measure to compare various bonds with different maturities and coupon rate and structure.
5. YTM is the most useful factor to estimate whether a bond would be useful for an investor to invest, or not.
6. As debt mutual funds invest in various bonds of different yield, coupon rate and duration, YTM is very important for judging the suitability of a debt fund for an individual investor.