Modified duration

Modified duration is the most direct measure of a debt fund's interest rate risk. It is quoted in years but reads most easily as a percentage.

• A modified duration of 3 means a 1 percentage point rise in interest rates would lower the fund's NAV by about 3%.
• On the same fund, a fall in rates of 0.5 percentage points would raise the NAV by about 1.5%.

The estimate works well for small rate changes and becomes less exact for large ones.

Fact sheets show three related figures:

• Average maturity is the weighted average time until the fund's bonds are repaid.
• Macaulay duration is the weighted average time until all interest and principal are received. SEBI uses it to define debt fund categories, for example 1 to 3 years for short duration funds and more than 7 years for long duration funds.
• Modified duration is Macaulay duration adjusted for the bonds' yield, which turns it into price sensitivity. It is always a little lower.

A liquid fund has a duration of a month or two; a long-duration gilt fund can have 10 years or more. Read with YTM, duration shows how much a rate change could add or take away.