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.