What is the average maturity in debt funds?

In this article, we will be discussing the term average maturity in debt funds. Debt funds invest in multiple fixed income or debt securities. It’s important to note that each security in the portfolio may have a different maturity. A bond or a debt instrument’s maturity date indicates a future date on which an investor gets the principal back. On this day, the borrowed amount will be fully repaid and the debt instrument ceases to exist that day onwards.

Average maturity in a debt fund is the weighted average of all the maturities of the debt securities held in the fund. Weights are a percentage of holding of security in the fund. For example, debt fund having an average maturity of five years constitutes debt securities held by the fund that on average will mature in five years. However, individual securities may have a different maturity than five years.

Now, let’s understand how average maturity is computed in a debt fund. Before investing in a debt fund, it is always advisable to look at the average maturity of that fund. Average maturity of a debt fund can be calculated very easily with the help maturity period of each security and the amount invested.

Let’s see the following example:

 

Bond

Maturity

Amount Invested per annum (Rs.)

Maturity* Amount (Rs.)

Bond 1

2-year

30000

60000

Bond 2

3-year

10000

30000

Bond 3

5-year

20000

100000

Total

60000

190000

Weighted Average Maturity

= 190000/60000

= 3.17 Years

 

*Please Note: The numbers are fictitious and used for reference purposes only.

In this example, the debt fund has three bonds with maturity of 2, 3, and 5 years respectively. Amount invested in the 2, 3, 5-year bond is Rs. 30000, Rs. 10000, and Rs. 20000 respectively. First, you need to multiply the invested amount with the corresponding maturity period. Next, you need to divide the total product by the total amount invested to arrive at the average maturity of the debt fund, which is 3.17 years in the above example.

Although the average age of the debt fund is 3.17 years in the example, the individual bonds have maturity, which is different from 3.17 years. So, what does this imply?Average maturity tells us the weighted average maturity of that fund, which in turn represents interest rate sensitivity.

Mutual funds with several long maturity securities in its portfolio are more sensitive to NAV fluctuations.However, it is generally believed that modified duration is a better indicator of interest rate sensitivity compared with average maturity.It’s very important to know that average maturity does not indicate the life of a debt fund.Thus, an open-ended fund never matures. For instance, if you invest in a bond fund with an average maturity of 6 years, you don’t have to hold the fund for 6 years. You can sell it next day or even after 20 years. What this means is that the maturity of the fund’s bod holding is six years.

Average maturity of a debt fund portfolio undergoes a change with the passage of time. As a debt security approaches its maturity date, the length of time to maturity becomes shorter. Thus, even if a fund buys and holds a debt portfolio, the average maturity of fund keeps on decreasing until the held security reaches its maturity date. Moreover, if a fund sells a security and buys a fresh one, average maturity will obviously change since each security has its own maturity period.

Following is a detailed classification of debt funds based on maturity:

 

Debt fund type

Average maturity

Liquid funds

Up to 3 months

Ultra short-term or low-duration funds

3 months – 1 year

Short-term funds

1 – 3 years

Medium to long-term income funds

3 – 7 years

Long term/guilt funds

More than 7 years

 

We recommend the following debt funds for you to consider based on average maturity:

 

Debt fund name

Debt fund type

Average maturity

Axis Liquid Fund(G)

Liquid funds

Up to 3 months

Franklin India Ultra Short Bond Fund

Ultra short-term or low-duration funds

3 months – 1 year

Franklin India Short Term Income Plan

Short-term funds

1 – 3 years

Kotak Medium Term Fund

Medium to long-term income funds

3 – 7 years

HDFC High Interest Fund

Long term/guilt funds

More than 7 years

 

For more information on Debt Products, write us at investmentz@acm.co.in

Happy Investing!

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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