Modified Duration measures the approximate percentage change in a bond's price for a 1% (100 bps) change in yield. A modified duration of 4.5 years means: yields up 1% → price falls ~4.5%; yields down 1% → price rises ~4.5%. It is the headline interest-rate-risk number for any debt mutual fund.
Worked INR example
An ICICI Prudential Long-Duration Fund factsheet shows modified duration 12.3 years and YTM 7.1%. If 10-year G-Sec yields rise from 7.0% to 7.5% (a 50 bps move), expected NAV impact ≈ −12.3 × 0.50% = −6.15%. Conversely, a 50 bps rate-cut cycle would deliver ~+6% capital gain on top of the 7.1% YTM.
When to use
- Choosing between liquid (duration ~0.1y), short-duration (~1.5y), and gilt funds (~7-10y) by rate-view
- Pre-RBI-MPC positioning: shift to longer duration if expecting cuts
- Computing hedge ratios in a bond-portfolio context
SEBI caveat
SEBI mandates modified duration in every debt MF factsheet. The linear approximation is accurate for ±50 bps moves; for larger moves, add convexity adjustment. Past duration does not predict future rate moves.
Related terms: YTM, Convexity, Credit Spread.