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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

An investor needs money in about 2 years for a down payment and has low risk tolerance. A distributor wants to avoid the main risk that would hurt a long-duration debt fund over this period. Which risk is that?

The main risk is interest rate risk. When yields rise, prices of long-duration bonds fall and the fund's NAV drops, and a 2-year horizon may be too short to recover. Matching the fund's duration to the investor's horizon reduces this risk.

  1. AInterest rate risk causing NAV fluctuation if yields riseCorrect
  2. BCurrency risk from foreign holdings
  3. CRisk of the fund buying only government securities
  4. DLock-in risk under a mandatory 3-year period

Explanation

Long-duration debt funds have high modified duration, so a rise in yields lowers NAV sharply, and a 2-year horizon may not allow recovery. A shorter-duration or target-maturity fund matched to the horizon reduces this. Holding government securities is not itself a problem, and no 3-year lock-in applies to such funds.

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