How do I think about bond duration?

Bond Duration — The Core Idea

Duration answers one question: how sensitive is this bond (or fund) to a change in interest rates?

Macaulay Duration

Technically, it is the weighted average time to receive a bond's cash flows (coupons + principal), expressed in years. ^[7]

• A zero-coupon bond's duration equals its maturity — you receive everything at the end.
• A coupon-paying bond's duration is always less than its maturity — some cash comes back earlier as coupons. ^[6]

Modified Duration — The Number You Act On

Modified duration converts Macaulay Duration — definition">Macaulay duration into a price-sensitivity measure: ^[9]

$$\% \Delta P \approx -D_{mod} \times \Delta y$$

Plain English: A fund with modified duration of 7 years loses ~7% in price if yields rise by 1% — and gains ~7% if yields fall by 1%. ^[2]

Three Rules to Anchor Your Intuition

1. Longer maturity → higher duration → more volatile. ^[7]
2. Lower coupon → higher duration (less cash comes back early). ^[7]
3. Duration does not grow infinitely — it plateaus as maturity extends. ^[6]

Why This Matters for Indian Investors Right Now

As of 2025, the spread between the 91-day T-bill (6.4%) and the 10-year G-Sec (7.1%) is only ~70 bps. ^[2] You earn 70 bps of extra yield for taking on 10× more duration risk. That is a poor trade-off in most portfolios.

The screening question: What is this fixed-income allocation for?

^[1]

Reading a Debt Fund Factsheet

Every Indian debt fund discloses its modified duration in its monthly factsheet. That single number tells you the interest rate risk you are accepting. Compare it against the CRISIL or Nifty benchmark index for that category to verify the fund is not taking hidden duration bets. ^[10]

Apply this → Check the modified duration of your current debt funds at Benchmarks / ETF Explorer and compare against category peers.