Mutual Fund Investment Duration

Duration measures a bond's sensitivity to changes in interest rates. It is a measurement of how long, in years, it takes for the price of a bond to be pay off by its internal cash flows. The longer the bond has until maturity, the greater will be its duration. The longer a bond's duration, the more responsive it is to changes in interest rates. Duration constantly adjusts as coupon payments are made over the life of a bond.

If an investor expects interest rate to fall during the course of time the bond is held, a bond with longer duration will be preferred as the bond’s price would increase more than comparable bonds with shorter durations. On the other hand, an investor, who is concerned about wide fluctuations in the principal value of bond holdings should consider a bond with short duration. Investors who are comfortable with fluctuation and are confident that interest rates will fall should look for a longer duration bond.