Understanding Bond Funds | The Amplifying Power of Duration

What is Duration in Bond Funds?

Duration can be thought of as the weighted average time until all cash flows (coupons and principal) are received, where the weights are the present values of each cash flow.

However, it's not merely a time concept. Rather, it's a metric that comprehensively takes into account factors such as the bond's coupon rate and yield to maturity, to measure how sensitive bond prices are to interest rate changes.

The Rule:

– Long duration: Large price swings when rates change

– Short duration: Small price swings when rates change

Think of it as: a"magnifying glass" that amplifies how interest rates affect bond prices.

For example, consider a bond with a face value of S$10,000:

Understanding Bond Funds | The Amplifying Power of Duration

Different Interest Rate Environments Call for Different Duration Strategies

Different duration strategies will produce different investment outcomes under varying interest rate environments. Please refer to the scenario simulations below:

*Source：MAS https://eservices.mas.gov.sg/Statistics/dir/DomesticInterestRates.aspx. Data processed with a 60-day rolling average.

How to Choose Bonds Funds Based on Interest Rate Environment and Your Needs?

To determine whether a bond fund's duration or investment strategy suits your investment objectives, consider these three key points:

1. Your View on Interest Rate Trends: Do you believe we are currently in a rate-cutting or rate-hiking cycle? Will interest rates experience rapid fluctuations?

2. Your Risk Tolerance and Investment Horizon: How much volatility can you accept? How long are you planning to invest for?

3. Dynamic Duration Monitoring: Investors can review the monthly updated fund fact sheets to track information on the duration of bonds held in the fund's portfolio, and make investment decisions accordingly.

*Important Notice: Even with the same duration, different funds carry different credit and liquidity risks. A comprehensive assessment is essential!

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Where can I find duration statistics for bond funds?

Go to Fund's details page > Profile Tab > Fund Documents - Fact Sheet.