A duration fund is a type of debt mutual fund that invests primarily in fixed-income securities such as government bonds, corporate bonds, and other debt instruments, with a specific focus on managing interest rate risk through the concept of duration. Duration measures a bond’s sensitivity to changes in interest rates. In simple terms, it indicates how much a bond’s price is likely to rise or fall when interest rates change.

Duration funds are categorised based on the average duration of the bonds they hold. Short-duration funds typically invest in bonds maturing within one to three years, offering lower risk and moderate returns. Medium- and long-duration funds, on the other hand, hold securities with longer maturities, which can provide higher returns but also greater exposure to interest rate fluctuations.

These funds perform well when interest rates fall because bond prices rise, but they may experience declines when rates increase. Investors often choose duration funds based on their interest rate outlook and investment horizon. For instance, long-duration funds suit those expecting a rate cut or seeking long-term capital appreciation, while short-duration funds are better for conservative investors seeking stability.

Overall, duration funds allow investors to tailor their fixed-income exposure to match risk tolerance, market conditions, and return expectations, making them a flexible tool for managing interest rate risk within a portfolio.

A duration fund is a type of bond fund that focuses on managing interest rate risk by targeting a specific duration, which measures a bond’s sensitivity to interest rate changes. The fund invests in fixed-income securities with varying maturities but adjusts its portfolio to maintain a consistent average duration. Longer durations tend to offer higher returns but are more sensitive to interest rate fluctuations, while shorter durations provide lower risk and less price volatility. Duration funds are used by investors seeking to balance income generation with interest rate risk management. They are particularly useful in changing interest rate environments, as fund managers can adjust the portfolio to protect against rate increases or capitalize on declines. This makes duration funds a strategic tool for fixed-income investment planning.