Duration risk is the risk that the market value of a fixed-income investment — such as a bond, NCD, or debt mutual fund — will decline due to a rise in market interest rates. Duration measures the sensitivity of a bond's price to interest rate changes — a bond with a duration of five years will approximately lose 5% in market value for every 1% rise in interest rates. Longer-duration bonds and debt funds are significantly more sensitive to interest rate movements than shorter-duration instruments — making them riskier in rising rate environments. In India, long-duration gilt funds and 10-year government bond funds carry high duration risk — during the RBI's rate hiking cycle of 2022 to 2023, long-duration debt funds delivered negative returns as bond yields rose sharply. Investors in Indian debt mutual funds should match the fund's duration to their investment horizon and interest rate outlook — choosing short-duration funds for capital preservation with low rate sensitivity and long-duration funds for potential capital gains when rate cuts are anticipated. SEBI's risk-o-meter for debt funds incorporates duration risk as a key component of the overall risk assessment.
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