Macaulay Duration is the weighted average time to receive all cash flows (coupons + principal) from a bond — it is the 'centre of gravity' of cash flows and the basis for measuring interest rate sensitivity.
Macaulay Duration = Σ [t × PV(CFt)] ÷ Bond Price, where t = time of each cash flow and PV(CFt) = present value of cash flow at time t. For a zero-coupon bond, Macaulay Duration = years to maturity (all cash flow at the end). For a coupon bond, Macaulay Duration < maturity (because coupon payments arrive before maturity, reducing the weighted average). SEBI uses Macaulay Duration to define debt fund categories: e.g., Ultra Short Duration funds must have Macaulay Duration of 3–6 months.
Macaulay Duration is not the same as average maturity. A 10-year bond that pays generous coupons every year might have a Macaulay Duration of only 7 years — because a lot of the value arrives as coupons before year 10. A 10-year zero-coupon bond has Macaulay Duration of exactly 10 years (all cash flow at the end). Macaulay Duration is the 'balance point' of your bond's cash flows in time.
For each cash flow (coupon or principal), calculate its present value.
Multiply each PV by the time of that cash flow.
Sum and divide by the bond's total price.
Result: time-weighted average when you receive value from the bond.
SEBI fund categories specify Macaulay Duration ranges (e.g., liquid: <91 days, overnight: 1 day).
D = Σ [t × PV(CFt)] ÷ P₀