Debt fund- Yield and Average Maturity

By | April 27, 2011

These are the two important factors that you need to look into while investing in a debt fund.

Average maturity tells the investors how sensitive a bond fund is to change in interest rates. Debt funds react inversely to interest rates movements. When interest rates move down, the prices of the bond move up which results in capital appreciation for the investors and boosting the returns on their debt fund portfolios. And when the interest rates move up, the prices of bond move down, it will lead to a fall in the fund value. If the portfolio of a debt fund is loaded with long-term bonds – high average maturity -it will be highly sensitivity to interest rates movements.

Government securities, government bonds, corporate papers and certificates of deposits etc are the fixed income avenues where a debt mutual fund invests. Each instrument has its own maturity date where the holder of the security is paid the original amount of money borrowed.


This term is basically used when the investor of the debt fund receives the amount at the time of maturity. All the incomes, gains and losses that the fund earned will be given to the investor at the time of maturity. It is important for the investor to analyze the YTM so as to expect the possible returns which he might get when the fund matures.

These are the two important aspects that an investor should look out for before investing in debt funds. It is wise to keep a track of your investment on a timely basis so as to make any changes before you lose out on all your savings. Getting into the hassle of taking a personal loan or getting into a debt of a credit card to finance your goals can be quite messy. If the loan amount is of a longer duration then prepaying it can increase the burden on your finances.

If the markets behave in a situation such that, the rates are foreseen to rise, it is prudent to move your investments to a short period of time as the debt investments do not react aggressively to such changes and the fall in the rates should prompt you t move your investments for a longer maturity date.

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