Interest Rate Risk — Mutual Fund Term Explained

For debt funds: when interest rates rise, fund NAV falls. Funds with longer duration are most affected.

When interest rates rise, bond prices fall — and vice versa. This inverse relationship creates interest rate risk for debt fund investors.

During RBI rate hike cycles, long-duration gilt funds can fall significantly. During rate cut cycles, they can deliver equity-like returns.

Related terms

• Modified Duration — For debt funds: the approximate % change in NAV for a 1% change in interest rates. Higher = more sensitive to rate changes = more interest rate risk.
• Gilt Fund — A debt fund investing only in Government Securities. Zero credit risk since backed by the government, but significant interest rate risk.
• Debt Fund — A mutual fund investing in fixed income securities — bonds, G-Secs, commercial paper. Lower risk than equity but also lower returns.

Browse the full mutual fund glossary, or see this concept in action in the fund screener.