Duration estimates how sensitive a bond portfolio is to interest-rate changes. Higher duration usually means larger NAV moves when rates change. That is why a “safe sounding” gilt fund can still show painful mark-to-market losses in a rising-rate phase.
Intuition without the formula
Imagine owning a long fixed coupon while new bonds start paying higher coupons. Your older bond is less attractive, so its price falls. Funds mark that price every day. Your statement moves even if you did not sell.
- Short horizon → prefer low duration categories.
- Long horizon + rate view → duration can be a deliberate bet, not an accident.
- If you need stable NAV next year, do not buy long-duration for a small yield bump.
Conclusion
Duration risk is not a bug—it is the mechanism behind many debt-fund return differences. Align duration with your holding period, or the market will align your emotions for you.