Investors seeking to earn maximum returns by staying invested for longer periods should become familiar with long duration funds. These yield maximum returns for investors with high risk appetites, owing to the high probability of periodic interest rate fluctuations.

What are Long Duration Funds?

Prior to investing in long duration funds, it is important to understand the meaning of the term ‘macaulay duration’. Macaulay duration is a concept used to measure the time taken to earn returns on your investment in a bond. 


It takes into consideration the interest earnings as well as the principal repayment on securities like from debt funds. Thus, this figure helps investors account for the impact of interest fluctuations while calculating returns. 


The duration of long term mutual fund schemes ranges from 7 to 10 years. However, remember that these schemes invest in debt and money market instruments with a macaulay duration of more than seven years. 

This implies that you should be investing in a long duration mutual fund only if you can stay invested for a similar timeframe.

How do Long Duration Funds Work?

In long duration mutual funds, a large proportion of money is invested in government securities, bonds, treasury bills and more. However, the lengthy duration makes these funds extremely sensitive to interest rate cycles, making it a highly risky investment avenue. 


This, however, allows investors to earn high capital gains as well as interest/dividends. 

This further equips long duration mutual funds to offer higher returns in a scenario where the interest rate is on a decline.

Pros of Long Duration Funds

There are a few unique benefits you stand to enjoy by investing in long duration funds. These are as follows:

  • Higher Return Than Most Other Debt Funds

Since long duration funds are designed for you to stay invested for a long time, they attract high risk as well as high returns. Other debt funds with shorter durations may minimise risk and tenure but miss out on the benefits of growing your income. 

  • Better Returns Than FDs

The returns on these funds are slightly higher than FDs invested for similar time periods. Hence, they provide a great alternative if you want higher returns and are willing to take on more risk than secured options. 

  • Portfolio Diversification and Tax Efficiency

Long duration funds provide you with an avenue to diversify your investment portfolio without taking on the volatility that comes with equity funds. Also, if you fall in the high- income tax bracket, you can enjoy more tax benefits while investing in these funds.

Cons of Long Duration Funds

There are a couple of drawbacks to keep in mind before investing in long term mutual funds. These are as follows: 

  • High Degree of Interest Rate Risk

The longer the duration of the investment, the more likely it is that it will be severely affected by changing interest cycles. Due to this, investors have a heightened chance of losing their principal investment amount. 


Hence, these schemes are not suitable for investors with even slight risk aversion. Rising interest rates exponentially increase this risk.

  • Chances of Credit Risk 

Since these funds invest in corporate bonds and government securities and bonds, the credit risk is comparatively lower. However, long duration funds are often affected by credit risk. 


The chances of issuer default increase as the duration gets longer. There is also a chance for lower-rated securities to fall to even lower ratings.

Points to Consider Before Investing in Long Duration Funds

Here are a few useful pointers to keep in mind before you invest in long duration funds:

  • Long Investment Horizon

These funds have extremely long timelines. Ideally, you should invest in these only if you can afford to put aside the investment amount. This, and the awareness that you may lose a large portion of funds over time, is extremely crucial to note.

  • Expense Ratio

Keep an eye out for the expense ratio, as there is a possibility that the long duration comes with a higher fund management charge. If so, it may eat into your actual returns.

Who Should Consider Investing in Long Duration Mutual Funds

These funds are suitable for investors who have an investment horizon of 7 years or more to meet significant future expenses. If you have a bigger risk appetite for the possibility of earning high returns, opt for long duration mutual funds. All in all, they can be a great alternative to investing in equity mutual funds.

On Bajaj Markets, you can learn more about long term debt funds and compare the historic returns of top schemes. You can choose schemes with high ratings, understand projected returns and invest in the scheme of your choice, all under one roof.

FAQs on Long Duration Funds

Are long duration funds open or close-ended funds?

These are open-ended funds. However, you can consider investing in long duration funds only if you have an investment horizon of 7 years or more.

Are long duration funds safe?

While the credit risk is not very high, the returns are far from guaranteed in the long duration funds. Individuals with a risk appetite to tolerate extreme volatility generally seek to invest in these fund.

Does investing in long duration funds provide steady income?

If you are confident that interest rates will fall over the period of your investment, you can invest in these funds with a purview to earn high returns. Over the estimated investment horizon of 10 years, it is possible to earn regular interest/dividend income from these funds.

Who should invest in long-duration funds?

Ideally, these instruments are intended for those with a longer investment horizon and a higher risk appetite. First-time or novice, conservative investors may not be suited for these funds.

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