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Excel tool that helps to manage interest rate risk in debt mutual funds

Sebi has classified certain categories of debt funds based on their portfolio duration and therefore, it is imperative to understand its relevance. Duration measures the sensitivity of the price of a bond to changes in interest rates.

By Sameer Bhardwaj, ET Bureau |Updated: March 23, 2020, 06.03AM IST
Recession fears, fiscal deficit concerns and FII outflows from emerging markets are expected to lead to interest rate volatility in future. This will impact returns of debt funds that hold a portfolio of longer tenure securities or bonds. To estimate such interest rate risk, a statistic known as duration proves very effective. It measures the number of years in which
maturity is 1 August 2024, the duration falls to 3.69 years. Moreover, as the coupon rate goes up, the duration falls. If the coupon is changed to 8.5%, the duration falls to 4.26 years. The readers can play with the numbers and observe how the maturity and coupon rate influences the duration or the interest rate risk of a bond.

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