What is duration and how do I use it to gauge a bond fund's interest-rate risk?
Duration measures how sensitive a bond or bond fund's price is to interest-rate changes, expressed in years. A rough rule: for every 1 percentage-point move in rates, a fund's price changes by about its duration in the opposite direction. A fund with a duration of 6 would drop roughly 6% if rates rose 1%, and gain about 6% if rates fell 1%.
Duration lets you match your bonds to your time horizon and risk comfort. Money you need in a year or two belongs in short-duration bonds or cash; a long-term investor can tolerate intermediate durations for higher yield. You will find duration listed on any fund's fact sheet or on Morningstar. If rising rates worry you, favor shorter durations; if you expect rates to fall, longer durations amplify the gain.