Modified Duration — Mutual Fund Term Explained

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.

Modified duration measures the interest rate sensitivity of a debt fund's portfolio. If a fund's modified duration is 5 years, a 1% rise in interest rates causes the NAV to fall by approximately 5%.

Gilt funds have high modified duration (6-10 years); liquid funds have very low duration (<91 days).

Formula

ΔPrice ≈ −Modified Duration × Δ Interest Rate

Related terms

• Macaulay Duration — The weighted average time to receive all cash flows from a bond. The basis for Modified Duration calculations.
• Interest Rate Risk — For debt funds: when interest rates rise, fund NAV falls. Funds with longer duration are most affected.
• Gilt Fund — A debt fund investing only in Government Securities. Zero credit risk since backed by the government, but significant interest rate risk.

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