Articles Details

2 Most important parameters while selecting debt fund

DateFeb 03, 2016/Comments0/CategoryDebt Mutual Fund

If you are looking to invest for a short term goal which is less than 5 years away, what kind of debt fund would you choose?

Simple answer to the above question is follow our recommendations and you are done.

But to be fully confident about your selection of fund it is better that you know what the 2 most important parameters are when it comes to selecting debt schemes.

Two important parameters for choosing the right category of debt funds are – AVERAGE MATURITY & MODIFIED DURATION

1) AVERAGE MATURITY

The average maturity of a debt mutual fund indicates the tenure or the time to maturity of all the assets held by the mutual fund. A debt mutual fund invests in various fixed income instruments such as government bonds, corporate papers, CDs, etc. each of these instruments have its own maturity date.

Average maturity does not indicate when the scheme matures. Open ended schemes do not mature.

Higher the average maturity of the portfolio, greater would be the interest rate risk. The NAV of the portfolio with the higher average maturity will fluctuate more in case of sharp movement in interest rate than those with teh lower average maturity.

2) MODIFIED DURATION

The modified duration (not to be confused with maturity) is the measure of price sensitivity of the fund to change in interest rates. Funds with a longer modified duration would be more sensitive to a given change in interest rates. For example, a bond / fund with a modified duration of 4.9 years can be expected to undergo a 4.9% change in price for each 1% movement in interest rates.

Higher the average maturity higher would be the modified duration!

Higher the modified duration higher would be the interest rate risk!

Funds with the higher duration tends to give the higher return in falling interest rate scenario, but in case of rising interest rate scenario it can generate the negative return.

So it is always better to create your portfolio with the schemes that suits the interest rate cycle keeping in mind the modified duration of the fund.

PDF

Share Post :

2 Responses

Report as on

09 May 2025

Our Article

2 Most important parameters while selecting debt fund

If you are looking to invest for a short term goal which is less than 5 years away, what kind of debt fund would you choose?

Simple answer to the above question is follow our recommendations and you are done.

But to be fully confident about your selection of fund it is better that you know what the 2 most important parameters are when it comes to selecting debt schemes.

Two important parameters for choosing the right category of debt funds are – AVERAGE MATURITY & MODIFIED DURATION

1) AVERAGE MATURITY

Average maturity does not indicate when the scheme matures. Open ended schemes do not mature.

2) MODIFIED DURATION

Higher the average maturity higher would be the modified duration!

Higher the modified duration higher would be the interest rate risk!

Funds with the higher duration tends to give the higher return in falling interest rate scenario, but in case of rising interest rate scenario it can generate the negative return.

So it is always better to create your portfolio with the schemes that suits the interest rate cycle keeping in mind the modified duration of the fund.

Prudent Corporate Advisory Services Limited

AMFI Registered Mutual Fund Distributor

CIN: L91120GJ2003PLC042458

AMFI Reg No.: ARN-9992 (Date of initial Registration; 02 September 2003; Current validity of ARN -26 August 2025)| SEBI Stock Broker Reg.: INZ000293634 | SEBI Depository Reg.: IN DP CDSL: IN-DP-477-2020 | NSE Member Id: 90209| BSE Member Id: 6733 | SEBI Research Analyst Reg.: INH000018115 |SEBI Investment Advisor Reg.: INA000004906 | PFRDA POP Reg.: POP 10092018 | IRDA Corporate Agent Reg. No. CA0869

* Mutual Fund investments are subject to market risks. Please read all scheme related documents carefully before investing.

Prudent Corporate Advisory Services Ltd. (ARN-9992) makes no warranties or representations, express or implied, on products offered through FundzBazar.com. It accepts no liability for any damages or losses, however caused, in connection with the use of, or on the reliance of its product or related services. Terms and conditions of the website are applicable. Copyright © 2024 Prudent Corporate Advisory Services Ltd.

Designed & Developed by

Mutual Funds

Guided Investing

Stock-broking

Utility

Articles Details

Categories

2 Most important parameters while selecting debt fund

2 Responses

LEAVE A REPLY

2 Most important parameters while selecting debt fund

Share on: