Yield to Maturity in Debt Funds: What YTM Really Means
Portfolio yield to maturity (YTM) in a debt fund factsheet is the weighted average yield of every bond the scheme holds on that date, assuming each one is held to maturity and every payment arrives on time. It describes the current basket at current prices. It does not promise you that return.
If a fund quotes a YTM of 7.6%, subtract the expense ratio and you have a rough starting point for accrual income. What you actually earn also depends on bond price moves, on whether any issuer defaults, and on what the manager buys next month.
The costliest mistake in debt funds is sorting the list by YTM and buying the top row. In fixed income, a higher yield almost always means the fund is carrying more credit risk, more interest rate risk, or both.
What Portfolio YTM Actually Measures
Take a bond trading at Rs 98 that repays Rs 100 in three years and pays a 7% annual coupon. Its yield to maturity blends the coupon stream and the Rs 2 gain at maturity into one annualised figure. Do that for every security in the scheme, weight each by its share of net assets, and you get portfolio YTM.
Two assumptions sit inside that number: every issuer pays in full and on schedule, and every cash flow is reinvested at the same yield. Real portfolios break both.
Factsheets print YTM next to Macaulay duration and modified duration, and AMCs publish full portfolios on their own sites and on the AMFI site. Read yield and duration together. One without the other tells you almost nothing.
Why Realised Return Differs from the Quoted YTM
The expense ratio comes off the top
YTM is a gross number. A scheme quoting 7.6% with a direct plan expense ratio of 0.30% starts you near 7.3%. The regular plan of the same scheme at 1.10% starts you near 6.5%. In equity that gap is annoying. In a debt fund earning 7%, it is a sixth of your return.
Accrual versus mark to market
Debt schemes value holdings at market prices daily. When the RBI raises the repo rate, or bond yields rise for any other reason, prices fall and NAV falls even though no coupon changed. As a rough rule, a fund with modified duration of 4 loses about 4% of NAV if yields rise 1%, and gains about the same if yields drop 1%. Over three months that swing can easily drown out accrual.
Credit events
A downgrade or default forces a writedown. One paper at 4% of assets marked down 40% costs NAV roughly 1.6% in a single day, which is a quarter of accrual income gone. Realised return then lands well below the YTM printed before the event.
The portfolio keeps changing
YTM is a photograph, not a video. Bonds mature and get replaced at whatever yields prevail then. A liquid fund quoting 6.9% today may be reinvesting at 6.2% next quarter if the rate cycle turns.
The Highest YTM Trap
Bond markets do not hand out free yield. If two funds hold paper of similar maturity and one yields 2% more, the market is charging that 2% for a reason: weaker credit, longer duration, or thinner liquidity.
| Fund type | Illustrative YTM | Typical duration | Main risk |
|---|---|---|---|
| Overnight fund | 6.2% | 1 day | Almost none |
| Liquid fund | 6.8% | 30 to 60 days | Mild rate risk |
| Corporate bond fund (AAA) | 7.3% | 2 to 4 years | Rate risk |
| Credit risk fund (AA and below) | 8.6% | 2 to 3 years | Default risk |
| Long duration gilt fund | 7.1% | 8 to 12 years | Large NAV swings |
These figures are illustrative and shift with the rate cycle, so check the current factsheet. Notice the credit risk fund: SEBI category rules require it to hold at least 65% in paper rated AA and below. That extra yield is payment for accepting that a borrower may not pay.
How to Use YTM Without Getting Burned
- Compare YTM only within the same SEBI category, never across categories.
- Subtract the expense ratio of the plan you will actually buy.
- Read Macaulay duration beside it and match it to how long you will stay invested.
- Open the monthly portfolio and check the rating mix and the largest issuer weights.
- Treat any yield more than 100 basis points above category peers as a question, not a bargain.
Frequently Asked Questions
Is YTM the return I get if I stay invested till maturity?
Only in a target maturity or roll down scheme where bonds are held to maturity, and even then you subtract the expense ratio and assume nobody defaults. Open-ended funds keep buying and selling, so their YTM changes every month. Treat it as a reading of current portfolio yield, not a locked rate.
Why did my debt fund NAV fall when its YTM was positive?
YTM captures accrual, while daily NAV also reflects mark to market price changes. If market yields rose, your existing bonds lost price value and NAV dipped even as accrual continued. Hold for at least as long as the scheme’s Macaulay duration and accrual usually recovers that dip.
Does a higher YTM mean the fund manager is better?
No. YTM mostly reflects the risk sitting in the portfolio, not skill. A manager earning 40 basis points more than peers with the same rating profile and duration is adding something; one earning 200 basis points more is almost certainly holding weaker credit.
Where do I find a scheme’s YTM and rating breakup?
The monthly factsheet on the AMC website carries YTM, Macaulay duration and the rating mix, and the full portfolio disclosure lists every issuer with its weight. AMFI hosts scheme level disclosures as well. The scheme information document tells you what the fund is permitted to buy.
Key Takeaways
- Portfolio YTM is the weighted yield of current holdings, not a promised return.
- Your outcome equals YTM minus expense ratio, plus or minus price moves, minus credit losses.
- A fund with modified duration of 4 moves about 4% in NAV for a 1% shift in yields.
- Unusually high YTM in a category signals weaker credit or longer duration.
- Always read YTM together with Macaulay duration and the rating mix.
