Bond prices are inversely related to interest rate movements. If interest rates rise, bond prices fall and vice versa. Debt mutual fund managers, who take duration calls, aim to gain from interest rate movements. If they expect interest rates to fall, they buy long maturity bonds. The price sensitivity of a bond to interest rate changes is directly related to the maturity of the bond. Long maturity bonds are more sensitive to interest rate changes. If interest rate falls, long maturity bonds make huge profits. Debt mutual funds which take duration calls are exposed to interest rate risk. These debt mutual funds can give high returns to investors in a favorable interest rate scenario, but can make losses in unfavorable interest rate scenarios.
