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Medium to long duration debt funds may be new for investors who typically invest in debt instruments to park money for shorter terms. These funds carry slightly higher risk owing to longer maturity periods. 

 

Thus, the investment undergoes the ups and downs of the changing interest cycle. However, they can offer higher gains and help you balance your investment portfolio.

What are Medium To Long Duration Funds?

Before investing in medium to long duration funds, it is important to understand the meaning of the term ‘macaulay duration’. Macaulay duration measures the time it takes for an investor to earn back the money invested in a bond. 

 

It takes into account the interest received and principal repayment. This is a concept used while managing debt funds to factor in the impact of interest rate fluctuations on the returns earned. 

 

Medium to long duration funds are debt mutual funds with a macaulay duration of 4 to 7 years. This simply means that to benefit from investing in these funds, your investment horizon should be in the range of 4 to 7 years. 

How do Medium To Long Duration Funds Work?

The bulk of the corpus in medium to long duration funds is invested in government securities or bonds of a longer duration. This implies that these have a very low credit risk. Keeping this in mind, you have the chance to earn higher returns on this investment as compared to low to medium duration debt funds. 

 

However, the long duration of these funds also means that they are more susceptible to volatility in interest rates. Due to this, medium to long duration funds can offer higher returns in a scenario where the interest rate is steadily falling. 

Pros of Medium To Long Duration Funds

Investing in medium to long duration debt funds allows you to reap a number of unique advantages, namely:

  • Higher Returns Than FDs

As a conservative risk-taker, you may opt to park your funds in FDs while seeking secure long-term debt investments. Medium to long duration debt funds may be a better alternative in terms of returns. 

 

In fact, they can also be a more tax-efficient investment if you fall in the higher tax brackets. However, remember that the interest rate risk still applies to these funds.

  • Portfolio Diversification

Investing in these funds enables you to strengthen your portfolio. These funds protect you from the volatility of the stock market, being less risky as compared to equity.

Cons of Medium To Long Duration Funds

Like with all investments, there is a drawback to investing in medium to long duration debt funds. This is as follows:

  • Highly Sensitive to Interest Rate Variations

The single biggest drawback of investing in these funds is their exposure to interest rate fluctuations as per market movements. The long duration of these funds means that they are likely to go through multiple interest cycles. 

 

So, if you need to urgently withdraw funds, there are high chances of facing losses. 

Things to Consider Before Investing in Medium To Long Duration Funds

To make better choices, there are a few things you need to consider before investing in medium to long term debt funds. These are as follows:

  • Risk of Increasing Interest Rates

These investments cannot be timed and will likely go through the interest cycle many times during the tenure. Due to this, there is a possibility that the investment could lose value if the interest rates steadily rise for prolonged periods.

  • Taxation

If you stay with these funds for less than 3 years, short-term capital gains will apply as per your income tax slab. If held for more than 36 months, you will have to pay long-term capital gains of 20%, with indexation benefit. 

 

Any dividends you earn from medium to long duration funds are to be added to your taxable income and taxed as per the applicable tax slab. 

Who Should Consider Investing in Medium To Long Duration Funds?

These funds are suitable for investors who have an investment horizon of 4 to 7 years. Thus, you can invest in them to meet medium-term financial goals. They can be a good option if you do not want to shoulder the risk accompanying equity funds but still want high returns. 

 

To know more about medium to long term debt funds, log on to Bajaj Markets. You can easily compare the best-performing funds of 2023, go through their historical returns and invest in the mutual funds of your choice. 

FAQs on Medium To Long Duration Funds

Are medium to long term debt funds riskier than short-term debt funds?

Yes, these funds have a long investment horizon of 4 to 7 years. So, it is highly probable that these will go through a full economic cycle. Therefore, the risk exposure will be higher as compared to short-term funds.

What are medium duration funds?

Medium duration funds are debt mutual funds which have a macaulay period of 3 to 4 years. 

Which is the best medium to long duration fund?

There are a number of well-performing funds in the market. Here are a few: Kotak Dynamic Bond Fund - Direct Plan - Growth, SBI Magnum Income Fund - Direct Plan - Growth, Kotak Bond Fund - Direct Plan - Growth, Aditya Birla Sun Life Income Fund - Direct Plan - Growth and Nippon India Strategic Debt Fund.

Do medium to long duration funds yield capital gains?

Yes, these funds offer the dual advantage of interest/dividend income and capital gains as compared to short-term debt funds that offer only interest income. This leads them to generate better returns than most debt funds.

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