Debt Mutual Funds Vol 2: Historic Returns vs Future Returns

“When you drive to your destination, focus should be on front and not on rear view mirror.”

Firstly, Thanks to the great response for our last write up on Debt Mutual funds. We discussed few important aspects about Who should invest in Debt MFs, The risks involved in Debt MFs and Which funds to buy. Since we briefly touched upon the way to select your funds, Few people took away the summary as “We should only invest in Liquid & Money manager funds only as they are less volatile and have stable returns“. This is how we humans are, We often get dissuaded by the historic returns and recent experience have higher impact on your decisions vs reality and future prospect. I agree it is futile to predict the future but if you get a sneak peek of the future, you are better to base your decisions on future view then past alone. Debt Mutual funds have the window to look at it’s future in terms of Yield to Maturity.

What is Yield to Maturity?

Yield to Maturity (YTM) is a technical term defined by Investopedia as “YTM is the total return anticipated on the bond if the bond is held till maturity.” In simple terms, When you do Fixed Deposit (FD) @8% for 3 years, you will get 8% return o your investments if held for 3 years. If we break the FD in between, banks might levy some charges or pay us lesser interest based on the duration we invested. Therefore the 8% FD has the YTM of 8%.

Thinking from the Debt Mutual Funds perspective, If the YTM of the fund is 10% and you invest in fund till maturity, You can assume to get a return of (10% – expense ratio of the fund). This gives us good indication of future returns but we need to understand the maturity of the fund.

What is the Maturity period for the Open-ended Debt Mutual Funds?

Key to make the most of the YTM return is to hold till maturity. Though maturity of Open-ended Debt Mutual funds refers to the average maturity of the holdings that fund have at the present. All the debt funds disclose it in their fund fact sheet as well as can be checked at Value Research online.

Apart from the Maturiy and YTM, you should definitely look for the expense ratio of the fund as well as the average rating of fund holdings to be in category A and above.

Read more on Mutual funds, Retirement Planning. Happy Investing!!