Convexity

Convexity is the second-order correction to modified duration. It captures the curvature in the bond price-yield relationship: bond prices rise more for a yield drop than they fall for an equal yield rise. Higher convexity = better asymmetric pay-off for the bondholder.

Worked INR example

A 30-year G-Sec has modified duration 14 and convexity 280. For a 100 bps yield drop, the duration-only estimate is +14% price gain. The convexity correction adds +½ × 280 × (0.01)² = +1.4% — total +15.4%. For a 100 bps yield rise, duration predicts −14% but convexity adds back +1.4% → only −12.6% loss. Asymmetric in the bondholder's favour.

When to use

• Long-duration / 30-year G-Sec portfolios where curvature matters
• Stress-testing rate-shock scenarios beyond ±50 bps
• Comparing two funds with similar duration — higher convexity preferred

SEBI caveat

Convexity is rarely on standard SEBI MF factsheets; you can request it from the fund house or compute it from holdings. Negative-convexity instruments (callable bonds, MBS) flip the asymmetry — extra caution needed.

Related terms: Modified Duration, YTM, YTC.