If you have invested in mutual funds, it is vital to know what the yield curve is and which is applicable for you. The curve is a combination of charts that gives you yield of bonds that are of the same quality but there would be different maturities that are linked up. It would give you the interest rates of the future and it is compared with a simple time vs yields. The curve would give you the rate with which the market are to transact the capital for all time terms. There are different kinds of yield curves.
- Normal yield curve: This condition is matched when there are long term interest rates instead of short terms. The curve in this case would be sloping upwards.
- Flat yield curve: When there is no change in the money market due to interest rates, a flat yield is achieved.
- Steep yield curve: This is quite common during the start of an economic expansion or when a period of recession is complete. The slope of the curve is the difference between the short and the long term yield. This has inputs from inflation and high long term interest rates.
- Inverted yield curve: There would be a downward sloping yield curve when the short term interest rates are higher than the long term interest rates. This is seen when there is high volatility in the market.
It is very important to match your mutual funds yield to the investment you have made and what you can expect from it.
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