Medium Term Mutual Funds

Under the SEBI categorisation framework, a medium term fund is a type of debt mutual fund, which invests in debt and money market instruments such that it maintains a Macaulay duration of the portfolio between 3 and 4 years. Macaulay duration indicates the weighted average time it takes to receive the fund's cash flows from its investments. In this case, the fund ensures that the investors recover their investment through coupons and principal in three to four years of duration. 

• Similar to other mutual fund schemes, Medium duration funds pool capital from various investors to invest according to a defined investment objective. 
• Portfolio managers actively oversee these investments by evaluating prevailing market conditions, interest rate movements, and credit risks. 
• To help mitigate concentration risk, portfolios may be diversified across different sectors, issuers and debt securities.  However, diversification cannot completely eliminate the risks associated with debt investments.

Although medium duration funds are not suitable for every investor, they can be a good fit for:

• Investors with Moderate Risk Tolerance: These funds carry lower risk than pure equity funds and provide competitive returns while effectively managing interest rate fluctuations. Consequently, they serve as a suitable choice for investors with a moderate risk profile.
• Investors with a 3 to 4 year investment horizon: Medium duration funds may be suitable for investors with a clearly defined financial goal in the next three to four years. If your investment horizon is shorter than three years, short-duration or liquid funds may be more appropriate. For goals that are seven years or more away, equity-oriented investments may be better suited for long-term growth.
• Investors looking to diversify their portfolios: Those who want to diversify their portfolios beyond equities can include medium-term funds to help spread risk.

Investing in medium term mutual funds on the Paisabazaar app is simple. Follow these steps given below:

• Open the Paisabazaar app and log in.
• On the dashboard, select “Mutual Funds.” 
• Click on ‘View all’ and filter using "Debt → Medium Duration."
• Browse and choose the most suitable medium duration fund.
• Select Lump Sum or SIP based on your suitability.
• Choose the mutual fund you want to invest in and select your investment mode.
• Specify the investment amount and complete your KYC verification to start investing.

Since medium-term funds are categorised as debt mutual funds, they are subject to the following tax rules:

• In case units are bought before April 1, 2023: Long-Term Capital Gains (LTCG) are taxed at 12.50% without indexation benefits. Short-Term Capital Gains (STCG) are added to your taxable income and taxed as per the applicable income tax slab.
• In case units are bought on or after April 1, 2023: Capital gains are taxed as per the investor's applicable income tax slab rate, regardless of the holding period.
• Dividend Taxation: If you select the Income Distribution Cum Withdrawal (IDCW) option, these funds distribute dividends. Dividends earned on funds are added to the investor's taxable income at their applicable marginal income tax slab rate. There is also a 10% TDS on dividend amounts exceeding ₹10,000 from a single AMC in a financial year.