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You can invest in numerous mutual fund schemes based on your investment goals, risk tolerance and preferred tenor. Medium duration funds are those funds that focus on debt and money market instruments for a period of 3 years or more. These funds could be suitable for conservative investors seeking alternatives to bank deposits or meet certain financial goals in a few years.

What are Medium Duration Mutual Funds?

A medium duration fund is a mutual fund that invests in debt and money market instruments for 3 years or more. These types of mutual funds have a comparatively longer investment period. Hence, they are less risky, which makes them suitable for risk-averse investors. 


These funds provide comparatively higher returns than bank deposits, overnight, liquid, and other funds. However, the expected returns may be lower than medium to long-duration and long-duration funds. Additionally, these funds are subject to interest rate, credit and liquidity risks.

How do Medium Duration Mutual Funds Work?

A medium duration fund works similarly to other types of mutual funds. The fund manager of the scheme invests the accumulated funds into the money market and debt instruments. 


The securities get selected according to the fund’s objectives, tenor, and risk level. After maturity, you can redeem your funds. You will have to pay a capital gains tax on the returns. The taxation will depend on when you redeem the funds.

Pros of Medium Duration Mutual Funds

Check out the advantages associated with investing in a medium duration fund.

  • Higher Returns

One advantage of investing in medium duration debt funds is that the returns are predictable. This is because these funds invest in securities that earn interest. Also, you get higher returns than short-duration funds, liquid funds, and bank deposits.

  • Helps Save for Specific Goals

Investing in these funds is ideal if you want access to funds for your specific goals in 3 years or more. Whether you want to purchase a vehicle or pay for your higher education, these funds can help. However, remember that the returns for these funds are not guaranteed.

  • Tax Benefits

A medium duration fund is more tax-efficient as compared to fixed deposits. This is because you need to invest for 3 years or more. Given this, your returns may qualify for indexation benefits. 

Cons of Medium Duration Mutual Funds

Like every investment, these funds also have some disadvantages. Here is a look into some of these cons: 

  • Associated Risks

Medium duration debt funds are subject to credit, interest rate and liquidity risks. Any changes in the interest rates have a negative impact on the prices of the bonds. Also, these funds have an investment horizon of 3 years or more, further exposing them to interest rate risks. 

  • Not Assured Returns

Another disadvantage of investing in these funds is that they do not provide assured returns despite the returns being predictable.

Things to Consider Before Investing in Medium Duration Mutual Funds

Investing is an essential decision, and here are some points you must consider before investing in a medium duration fund.

  • Personal Investment Objectives

While investing, the initial step is understanding your investment goals, risk tolerance, and preferred horizon. This will help you choose an option that best aligns with your preferences and objectives. 


Ideally, you must consider investing in these funds if you are a risk-averse investor and need the funds after 3 years or more. 

  • Investment Risks and Returns

Since medium duration debt funds are debt funds, they carry credit, interest rate, and liquidity risk. Therefore, review the fund's past performance during fluctuating interest rates to see how the fund performs in different situations. 


To ensure the credit risk is low, check the fund allocation to see if the investment is in high-quality securities. 

  • Associated Charges

Like every investment, a medium duration fund also comes with some charges. To assess these charges and keep them on the lower side, consider the expense ratio of the fund. Choose one with a lower ratio, as the cost would be low, resulting in a smaller impact on your returns.

  • Tax Implications

Tax implications on medium duration debt funds are similar to debt mutual funds. The gains are taxable based on the holding period. 


If you redeem within 3 years, it will be a short-term capital gain (STCG) and taxable according to your income tax slab. In case you redeem after 3 years, the returns will be long-term capital gain (LTCG) and are taxable at 20%. 

Who Should Consider Investing in Medium Duration Mutual Funds

A medium duration fund can be ideal for investors with a low-risk tolerance and an investment horizon of 3 years or more. These funds are also a suitable choice for beginners as the returns are predictable and are not affected by any equity market movement. 


Investing according to your future goals is essential. If you do not need access to your funds in a short period, then investing in medium duration debt funds can be a great choice. You can choose from top mutual fund schemes available on Bajaj Markets. 


You can choose not only medium duration funds but also other mutual funds for different preferences. Moreover, you can start your investment with a simple online process and minimal documentation!

FAQs on Medium Duration Mutual Funds

What is the ideal investment period for medium duration funds?

The ideal investment duration for a medium duration fund is at least 3 years.

Do I need to pay an exit load on medium duration funds?

The exit load on redemption of medium duration debt funds depends on the fund house and the AMC. You can check this information before investing and choose accordingly. 

What are the average expected returns for a medium duration fund?

The average return for medium duration funds ranges between 7-9% p.a. However, remember that the actual return will vary for different schemes in this category. 

What are the various debt instruments in which medium duration funds invest?

The investment of a medium duration fund is generally in debt instruments like corporate bonds, government securities, commercial papers and money market instruments. You can choose the allocation of specific funds before investing.

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