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

While comparing two debt funds for a client who wants lower interest rate risk over a 1-year horizon, the distributor notes that Fund X has a Macaulay duration of 0.8 years and Fund Y has a Macaulay duration of 4.5 years. Which statement is correct?

Fund X is more suitable because its duration of 0.8 years means lower sensitivity to interest rate changes. A longer duration like Fund Y's 4.5 years increases price volatility when rates move, which does not suit a one-year horizon.

  1. AFund Y is more suitable because longer duration reduces interest rate risk
  2. BFund X is more suitable because it has lower sensitivity to interest rate changesCorrect
  3. CBoth have identical interest rate risk because both are debt funds
  4. DFund Y is more suitable because its credit risk must be lower

Explanation

Duration measures sensitivity of price to interest rate changes; a longer duration means larger price movements for a given rate change. Fund X, with 0.8 years, has lower interest rate risk and matches the 1-year horizon. Duration says nothing directly about credit risk.

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