De-Jargoned | Bonds’ maturity

De-Jargoned | Bonds’ maturity

What’s maturity?

Every loan needs to be repaid eventually. The time between the points when the loan is taken to the time when it is fully repaid is called the loan’s tenure or maturity. While a tenure is usually expressed in terms of years, maturity is expressed as a date on which the loan principal is to be repaid.

What about bond funds?

Look our for your debt fund’s “average maturity" in your fund’s factsheet. Debt funds invest in a variety of debt papers, also a type of loan agreement, that mature over different points in time, an average of which tells you your fund’s average maturity. This figure is important as it indicates how volatile your debt fund really is.

Price-yield relation

When interest rates rise, bond prices (and your debt fund’s net asset value that invests in them) fall and vice versa. Say, a debt scrip’s yield is 10%. If interest rates rise, new debt papers will start offering higher interest rates, say 11%. Naturally, investors would go for the ones paying 11%. The value of the ones paying 10% would go down and thereby, their price.

Long and short

Debt funds with longer maturity are riskier and more volatile than the ones having shorter maturity. This is because the lender of a long-term loan has to wait for a longer time to get his money back. Liquid and short-term funds (lower maturity) are less volatile than long-term bond funds (higher maturity). Higher the risk, higher are the returns.