Medium Duration Mutual Funds

In any investment, the duration plays a vital role in ascertaining returns. Debt funds offer a plethora of options to conservative investors and maximum benefit if the investor’s investment horizon matches the maturity of the debt fund. Let’s talk about the Medium Duration Mutual Funds and its essential aspects that you should know before investing in them.

What are Medium Duration Mutual Funds?

Medium Duration Funds, as the name suggests, are open-ended, medium-term debt schemes that invest in debt securities and money market instruments for a medium time frame that is between three and four years (Macaulay duration). These funds are highly susceptible to interest rate movement and riskier than short-duration funds.

Hence, these funds are suitable for conservative investors with at least a three to four-year investment horizon. These funds are best suited for investors with specific financial goals to achieve in 3 years, and an excellent alternative to bank fixed deposits. The average returns from these funds are between 7 to 9%.

Who should invest in Medium Duration Mutual Funds?

It is ideal for investors with an investment horizon of a little over three years and a lower risk appetite. Further, these funds offer better returns to investors looking for alternative bank deposits for similar tenure. These funds also help to diversify the portfolio. However, it is crucial to invest according to your financial plan and investment objectives.

Advantages of Medium Duration Mutual Funds

Stable investment option: These are stable investment options as they invest in government securities, corporate bonds, commercial papers, certificates of deposits.

Less volatile: These funds are less volatile compared to equity-oriented mutual funds. Medium duration mutual funds are investments with lower risk and capable of earning a stable return.

Low risk: Medium duration funds are ideal for diversification of the portfolio, which results in a reduction of overall risk. In India, these funds invest in the right instruments after doing in-depth research and using the right strategy, thereby reducing risks.

Things you need to consider before investing in Medium Duration Mutual Funds

Risks

A medium duration fund is a debt fund that carries credit risk, interest rate risk and liquidity risk. Credit risk occurs when the portfolio contains low-credit rating securities. Hence, it should be ensured that the fund invests in high-quality debt securities where the credit risk is negligible. On the other hand, interest rate risk occurs when a change in interest rate affects the price of bonds negatively.

Returns

Before investing in these funds, research the performance of fund managers through different interest rate regimes. An experienced fund manager can only deal with the storm of a rising interest rate period optimally. A well-managed medium duration portfolio has the potentiality to earn around 7-9% returns.

Costs involved

The expense ratio is an essential factor in debt funds since the returns are already low. The mutual fund charges the expense ratio as a fee for fund management services. Also, there are debt funds which charge an exit load to prevent premature withdrawals. Choose funds carefully to save on Expense Ratio and Exit load, which help maximize your gains.

Financial Objective

Your financial objective is the first and foremost factor. Your choice of funds helps you fulfill your financial requirements. If you want to invest for financial goals such as purchasing a car or paying for educational expenses, etc. to meet in 3-4 years, you can invest in Medium Duration Funds.

Investment Horizon

If you are comfortable investing for more than three years, you can wisely choose medium duration debt funds.

Taxation

Medium duration funds attract STCG if the holding period is less than three years and taxable as per the income tax slab applicable. When the holding period is over three years, LTCG is taxed at 20% with indexation benefits. Dividends earned from these funds are tax-free but liable for a 25% dividend distribution tax.

It would be best if you had a well-thought-out investment plan to meet your financial goals effectively. Medium duration funds are the right choice for conservative investors to meet 3-4 year financial goals. Talk to your financial advisor to better understand the scheme to ensure that it matches your investment horizon.

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