Modified Duration measures a bond's or debt fund's price sensitivity to a 1% change in interest rates — a Modified Duration of 5 means the fund's NAV will fall ~5% if interest rates rise by 1%.
Modified Duration = Macaulay Duration ÷ (1 + YTM/m), where m = number of coupon periods per year. For a fund with Modified Duration of 7: if interest rates rise by 1%, the fund's NAV falls by approximately 7%. If rates fall by 1%, NAV rises by approximately 7%. This is the primary practical tool for understanding a debt fund's interest rate risk. Longer Modified Duration = higher NAV sensitivity to rate changes.
Modified Duration is the most actionable number in a debt fund's factsheet. It directly tells you: 'For every 1% move in interest rates, my fund's NAV moves by this %. If your debt fund has Modified Duration 8 and the RBI unexpectedly hikes rates by 0.5%, expect roughly a -4% NAV hit in the short term. The fund will recover as bonds mature and the portfolio is reinvested at higher rates — but the short-term mark-to-market pain is real.
Modified Duration = Macaulay Duration ÷ (1 + Yield/frequency).
NAV change ≈ −Modified Duration × Change in interest rate.
Rate up 1%, Duration 5 → NAV falls ~5%.
Rate down 0.5%, Duration 10 → NAV rises ~5%.
In rising rate environments: prefer lower Modified Duration funds.
In falling rate environments: higher Modified Duration funds benefit more.
MD = Macaulay Duration ÷ (1 + YTM/m)