Best Medium to Long Duration Funds
About Medium to Long Duration Mutual Funds
Medium to long duration funds belong to the fixed-income category of mutual funds. These funds invest primarily in debt securities such as government and corporate bonds, debentures, and other fixed-income instruments. The key differentiator for these funds is their investment horizon, typically ranging from 4 to 7 years or even longer.
The primary objective of medium to long-duration funds is to generate regular income for investors while maintaining a balance between safety and yield. These funds aim to provide a steady stream of income by investing in debt instruments with varying maturities.
Medium to long duration funds typically hold a mix of debt instruments with varying maturities. They may invest in a combination of government securities, corporate bonds, and other fixed-income assets. The portfolio manager’s goal is to optimise returns while managing interest rate risk effectively.
How Do Medium to Long Duration Funds Work?
Medium to long-duration funds primarily invest in fixed-income securities with maturities ranging from 4 to 7 years. These funds aim to provide investors with a balance between income generation and capital appreciation. Fund managers strategically select a mix of government and corporate bonds, adjusting the portfolio’s average duration to align with their interest rate outlook.
Longer durations generally mean higher interest rate sensitivity. As interest rates fluctuate, the fund’s net asset value (NAV) can change, impacting returns. Investors attracted to medium to long duration funds often seek higher yields than short-term alternatives but with more stability than funds with longer durations. It’s essential for investors to consider interest rate trends and economic conditions when investing in these funds to make informed decisions based on their risk tolerance and investment goals.
Features of Medium to Long Duration Funds
Medium to long duration funds come with distinctive features that make them a valuable addition to an investor’s portfolio. Here are some key features:
- Portfolio Duration: The duration of the fund’s portfolio is a critical aspect of medium to long duration funds. The portfolio duration represents the weighted average time it takes for the fund’s investments to mature. Funds with longer durations are more sensitive to interest rate changes and, therefore, may carry a higher degree of interest rate risk.
- Diversification: These funds provide diversification by investing in a wide range of debt instruments. Diversification helps spread risk, reducing the impact of potential defaults by individual issuers.
- Professional Management: Medium to long duration funds are managed by experienced portfolio managers who make investment decisions on behalf of investors. These managers assess market conditions and credit risks, adjusting the portfolio to optimise returns while minimising risk.
- Liquidity: While these funds have a medium to long investment horizon, they offer a degree of liquidity. Investors can generally buy or sell units on any business day, providing access to their invested capital.
- Regular Income: Investors in medium to long duration funds can expect regular income through interest payments from the underlying debt instruments. This can be advantageous for those who rely on periodic payouts for their financial needs.
- Capital Appreciation: Apart from interest income, capital appreciation is also possible in these funds. As interest rates fall, bond prices typically rise, resulting in capital gains for investors. Conversely, when interest rates rise, bond prices may decline, affecting the fund’s NAV.
Advantages of Investing in Medium to Long Duration Funds
- Portfolio Diversification: By incorporating medium to long-term mutual funds with a higher risk profile, you can effectively diversify your investment portfolio. This diversification can help shield your investments from the inherent volatility of the stock market.
- Higher Returns than FD: High-risk mutual funds can potentially offer more attractive returns when compared to similar-tenure bank fixed deposits. These funds may be a viable choice for individuals in higher income tax brackets seeking tax-efficient returns on their investments.
- Pursue Greater Returns: If you’re aiming for higher returns compared to low and medium duration funds, medium to long-term mutual funds present an option to explore.
- Secure Regular Income: If your financial goal involves generating a consistent income stream, low and medium duration funds may be better-suited investment choices.
Risks Involved in Medium to Long Duration Funds
While medium to long duration funds offer various advantages, they also come with their fair share of risks. Investors should be aware of these risks to make informed investment decisions. Here are the primary risks associated with medium to long duration funds:
- Interest Rate Risk: Medium to long duration funds are sensitive to changes in interest rates. When interest rates rise, bond prices typically fall, which can lead to a decline in the fund’s net asset value (NAV). Conversely, falling interest rates can result in capital appreciation, but it may also lead to lower future interest income.
- Credit Risk: Investors in these funds are exposed to credit risk, also known as default risk. This risk arises when the issuers of the underlying bonds fail to make interest payments or return the principal amount at maturity. Diversification can help mitigate credit risk, but it cannot eliminate it entirely.
- Inflation Risk: Inflation can erode the real value of interest income earned from medium to long duration funds. If the interest rate does not keep pace with the inflation rate, investors may find that their purchasing power decreases over time.
- Market Risk: Medium to long duration funds are subject to general market risk, which can impact the overall performance of the fund. Economic and geopolitical events, as well as changes in market sentiment, can affect the prices of the underlying securities.
- Liquidity Risk: While medium to long duration funds offer a degree of liquidity, they may not be as liquid as money market or short-term bond funds. Selling units during a market downturn or when the fund holds less liquid assets can result in a lower sale price.
Factors To Consider Before Investing in Medium to Long Duration Funds
When considering investing in medium to long-duration funds, it’s essential to make informed decisions that align with your financial goals and risk tolerance. Here are some factors to consider:
- Investment Horizon: Assess your investment horizon and determine whether it matches the medium to long-term nature of these funds. These funds typically have a maturity period of 4-7 years or more, so make sure your goals align with this time frame.
- Risk Tolerance: Evaluate your risk tolerance. Medium to long-duration funds are susceptible to interest rate fluctuations, which can impact their returns. Assess how comfortable you are with potential fluctuations in the fund’s value.
- Financial Goals: Clearly define your financial objectives. Are you investing for retirement, education, or another specific goal? Understanding your goals will help you choose the appropriate duration fund to meet your needs.
- Interest Rate Outlook: Stay informed about current interest rates and the economic environment. Medium to long-duration funds are sensitive to interest rate changes, and their performance can be influenced by the prevailing interest rate outlook.
- Fund Manager’s Track Record: Research the fund manager’s track record and experience. An experienced and skilled fund manager can make a significant difference in the fund’s performance over time.
- Expenses Ratio: Understand the expense ratios and fees associated with the fund. Lower expenses can have a positive impact on your overall returns, especially in the long run.
Who Should Invest in Medium to Long Duration Funds?
Consider exploring medium to long-term investment options when your financial goals span 4 to 7 years. These investment avenues may potentially provide superior returns compared to both short-term and medium-term alternatives. Embracing medium to long-duration funds can be a strategic choice to align with your mid-range financial aspirations.
These funds are suitable for a variety of investors, including:
- Conservative Investors: Individuals who are risk-averse and prefer stable, fixed-income investments can consider medium to long duration funds as they provide steady returns.
- Retirees: For retirees looking for regular income without the volatility of the stock market, medium to long duration funds can be a suitable choice.
- Goals with a Time Horizon: If you have financial goals that extend beyond a few years, such as saving for a child’s education or buying a home, these funds can help you generate returns in line with your goals.
- Regular income seekers: If you are seeking regular income from your investments, medium to long duration funds can be an attractive choice. The interest income generated from the underlying debt instruments provides a consistent cash flow, making it suitable for retirees or those who require periodic payouts.
Taxability of Medium to Long Duration Funds
Medium to long duration funds are subject to taxation rules akin to those applied to debt funds. The taxation of these funds is characterised by the following key points:
- Short-Term Capital Gains: If you hold the investment for a period of less than 36 months, any gains generated from it are taxed based on your income tax slab. This implies that the tax rate varies depending on your overall income and the applicable tax bracket.
- Long-Term Capital Gains: For investments held for 36 months or longer, the taxation of capital gains follows a different structure. These long-term gains are taxed at a flat rate of 20%. Additionally, investors can avail themselves of the indexation benefit. Indexation allows you to adjust the purchase price of medium to long duration funds to account for inflation. This results in a lower taxable capital gain.
- Taxation of Dividends: The dividends received from medium to long duration funds are treated as a part of your taxable income and taxed based on your applicable income tax slab.
How To Invest in Medium to Long Duration Funds?
Investing in a Medium to Long Duration Fund through your Angel One account is a straightforward process. Just follow these steps:
Step 1: Sign in to your Angel One account.
Note: If you don’t have an account with Angel One, you can quickly open a demat account by submitting the necessary documents.
Step 2: Choose a medium to long duration fund that aligns with your financial goals and risk tolerance. You can find detailed information about each medium to long duration fund on the Angel One app. Here’s what to consider:
- Search for the specific fund you wish to invest in.
- Assess the fund’s historical performance, tax implications, and investment in various sectors and companies. You can also estimate potential returns using the calculator.
- Evaluate the fund’s risk level, ratings, and expense ratio.
Step 3: After finalising the medium to long duration fund(s) you want to invest in, log in to your Angel One account, navigate to the Mutual Funds section, and locate your chosen fund. Then, decide whether you want to invest through a Systematic Investment Plan (SIP) or make a one-time investment:
- If you opt for SIP, select your preferred monthly SIP date.
- Next, input the amount you intend to invest and choose your preferred payment method.
- For SIP investments, you can set up an AutoPay for effortless future contributions.
By following these simple steps, you can seamlessly invest in a medium to long duration fund through your Angel One account.
Top 5 Medium to Long Duration Mutual Funds
The following are the top Medium to Long Duration Funds in India:
| Name of the Fund | AUM (₹ Cr) | Expense Ratio | Average YTM | Category YTM | CAGR 5Y | CAGR 10Y |
| ICICI Pru Bond Fund | 3085.06 | 0.62 | 7.27 | 7.20 | 7.25 | 7.78 |
| Aditya Birla SL Income Fund | 2185.07 | 0.74 | 7.33 | 7.20 | 7.25 | 7.51 |
| Kotak Bond Fund | 2065.88 | 0.70 | 7.10 | 7.20 | 7.42 | 7.48 |
| SBI Magnum Income Fund | 1854.90 | 0.77 | 7.57 | 7.20 | 7.35 | 8.03 |
| HDFC Income Fund | 863.39 | 0.80 | 7.09 | 7.20 | 6.45 | 6.71 |
The above-mentioned funds are for informational purposes only and are not recommendations. The funds are ranked based on AUM as of January 2025.
ICICI Pru Bond Fund
The ICICI Pru Bond Fund has the highest AUM among the 5 funds, at ₹3,085.06 crore, and an expense ratio of 0.62%.
The fund’s average YTM is 7.27%, slightly above the category YTM of 7.20%. Over the past 5 years, it has delivered a CAGR of 7.25%, ranking 4th in 5-year performance, while its 10-year CAGR of 7.78% ranks 2nd in the list.
Aditya Birla SL Income Fund
The Aditya Birla SL Income Fund has an AUM of ₹2,185.07 crore and an expense ratio of 0.74%.
The fund’s average YTM is 7.33%, above the category YTM of 7.20%. Over the past 5 years, it has delivered a CAGR of 7.25%, ranking 3rd in 5-year performance, while its 10-year CAGR of 7.51% ranks 4th.
Kotak Bond Fund
The Kotak Bond Fund has an AUM of ₹2,065.88 crore and an expense ratio of 0.70%.
The fund’s average YTM is 7.10%, slightly below the category YTM of 7.20%. Over the past 5 years, it has delivered a CAGR of 7.42%, the highest among the 5 funds, while its 10-year CAGR of 7.48% ranks 3rd.
SBI Magnum Income Fund
The SBI Magnum Income Fund has an AUM of ₹1,854.90 crore and an expense ratio of 0.77%.
The fund’s average YTM is 7.57%, the highest among the 5 funds, and above the category YTM of 7.20%. Over the past 5 years, it has delivered a CAGR of 7.35%, ranking 2nd in 5-year performance, while its 10-year CAGR of 8.03% is the highest in the list.
HDFC Income Fund
The HDFC Income Fund has the lowest AUM among the 5 funds, at ₹863.39 crore, and an expense ratio of 0.80%, the highest in the list.
The fund’s average YTM is 7.09%, the lowest in the list and below the category YTM of 7.20%. Over the past 5 years, it has delivered a CAGR of 6.45%, ranking the lowest in 5-year performance, while its 10-year CAGR of 6.71% is also the lowest.
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Medium to Long Duration Funds FAQs
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