Weighted average maturity
Also written Average maturity · WAM
The average time to maturity of a debt portfolio, each security weighted by its share of the portfolio — a simple indicator of how sensitive a debt scheme's NAV is to interest rate changes.
In plain language
When interest rates change, the prices of fixed-rate bonds change in the opposite direction. How much they change depends mostly on how long the bond has left to run. A bond maturing next month barely moves; a bond with ten years to go moves a lot. The workbook states it plainly: the longer the balance tenor, the higher the fluctuation in value for the same change in market interest rates.
A debt scheme holds many securities with different maturities, so it needs a single number that summarises them. Weighted average maturity is that number. Multiply each security's remaining maturity by its weight in the portfolio and add them up.
A scheme with a longer weighted average maturity can be expected to see its NAV fluctuate more when rates move than a scheme with a shorter one.
The workbook is candid about its status. Because it is simpler to comprehend, weighted average maturity is widely used, especially in conversations with lay investors. A professional debt fund manager would rely on modified duration, which captures interest rate sensitivity better.
How it works
The workbook's calculation: a scheme holds 70 per cent of its portfolio in a 4-year security and 30 per cent in a 1-year security.
(70% × 4 years) + (30% × 1 year) = 2.8 + 0.3 = 3.1 years
Its NAV can be expected to fluctuate more than that of a debt scheme with a weighted average maturity closer to 1.5 years.
Where it sits among the workbook's debt risk measures:
| Measure | What it tells you | Who relies on it |
|---|---|---|
| Weighted average maturity | Interest rate sensitivity, approximately, from maturities | Widely used with lay investors |
| Modified duration | Sensitivity of value to interest rate changes — higher means more interest rate risk | Professional debt fund managers |
| Credit rating profile | Credit or default risk | Separate dimension — maturity says nothing about it |
Maturity also frames the debt scheme categories. A liquid fund invests in securities with maturity of up to 91 days, and an overnight fund in securities maturing in 1 day. Most other categories, however, are defined by the Macaulay duration of the portfolio — for instance 1 to 3 years for a short term fund and more than 7 years for a long term fund — not by average maturity.
The formula
Weighted average maturity
= Σ (weight of security in portfolio × its remaining maturity)
where the weights add up to 100%
A worked example
A debt scheme has Rs 500 crore invested as follows. The portfolio is illustrative.
| Holding | Amount (Rs crore) | Weight | Remaining maturity | Weight × maturity |
|---|---|---|---|---|
| Government security | 200 | 40% | 5 years | 2.000 |
| Corporate NCD | 150 | 30% | 2 years | 0.600 |
| Commercial paper | 100 | 20% | 6 months (0.5 year) | 0.100 |
| Treasury bill | 50 | 10% | 91 days (0.25 year) | 0.025 |
| Total | 500 | 100% | 2.725 years |
The weighted average maturity is about 2.7 years.
Now suppose the fund manager, expecting rates to fall, sells the commercial paper and treasury bills (Rs 150 crore) and buys a further Rs 150 crore of the 5-year government security. The new calculation is (70% × 5) + (30% × 2) = 4.1 years. If rates do fall, the NAV gains more; if rates rise instead, it falls more.
For an investor holding Rs 10 lakh in this scheme and planning to withdraw in a year, that change matters more than any label on the brochure. It is also a warning sign the workbook asks investors to watch: a short-term debt fund that takes significant exposure to long-term instruments may be taking more risk than its investors are comfortable with.
Why NISM asks about it
Chapter 10 (Risk, Return and Performance of Funds), section 10.7.5, gives the 70 per cent / 4 years plus 30 per cent / 1 year calculation and contrasts weighted average maturity with modified duration (10.7.4). Chapter 12 then uses maturity and duration to match debt schemes to investors. Expect the 3.1-year computation or a variant of it, and a question on which measure a professional would prefer.
Common exam traps
- Longer weighted average maturity → more NAV fluctuation when interest rates change, not less.
- Professionals prefer modified duration; weighted average maturity is the simpler, lay-investor measure.
- It says nothing about credit risk. A short-maturity portfolio of low-rated paper is still risky.
- Weights must be portfolio shares. Do not average the maturities without weighting.
- Most SEBI debt categories are defined by Macaulay duration, not average maturity — liquid (up to 91 days maturity) and overnight (1 day) are the maturity-based exceptions.
- The workbook describes the same categories two ways. Chapter 2 defines a short term fund by portfolio Macaulay duration of 1 to 3 years and an ultra-short-term fund by Macaulay duration of 3 to 6 months; Chapter 12 describes short duration funds as investing in securities with maturities between 1 and 3 years and ultra-short term funds as holding securities of 3 to 6 months tenor. For a category-definition question, the Chapter 2 duration wording is the regulatory one.
Where this is taught
Free preparation for NISM Series V-ARelated terms
- Interest rate riskThe risk that an investor in a debt instrument loses return because rates rise — existing instruments carrying the old, lower coupon fall in value until their yield matches the new market rate.
- Modified DurationMacaulay's duration divided by (1 + yield) — the percentage by which a bond's price moves for a one percentage point change in interest rates, and so the standard measure of interest rate risk.
- Macaulay durationThe weighted average time, in years, to receive a bond's cash flows, each weighted by the present value of that cash flow — the bond's effective payback period.
- Potential Risk Class (PRC) matrixSEBI's grid for classifying a debt scheme by its maximum interest rate risk (Macaulay Duration) and maximum credit risk (Credit Risk Value), disclosed so investors know the ceiling the fund manager may take.
- Style driftA fund manager departing from the investment style the scheme promised — such as a value fund filling up with fully-valued front-line stocks — so investors carry risks they did not sign up for.
- VarianceA measure of how widely a scheme's periodic returns fluctuate around its own average return — the square of standard deviation, and a risk measure relevant to both debt and equity schemes.