What are Medium Duration Funds?
The open-ended mutual funds investing in debt and money market instruments, with the Macaulay Duration of the portfolio between 3 to 4 years are called Medium Duration Funds. The maturity period in Medium Duration funds is higher than short term funds but lower than long duration funds. As there is a longer tenure of investment involved, the returns from these funds are subject to interest rate change during the market fluctuations over time.
Several Asset Management Companies (AMC) in India offer Medium Duration Funds to the investors who are looking for a stable income investment options.
- Risk: Compared to short-term funds, medium duration funds have higher interest rates. Debt funds are majorly known as risk-free funds. However, these mutual funds are not completely risk-free. Credit-risk, Liquidity risk and Interest Rate risks are some of the standard risks attached to Medium duration debt funds
- Returns: The returns from debt funds are guaranteed as the investments are placed in financial instruments which produce fixed interest. However, if invested in instruments with low credit risk, the fund might fail to perform well
- Investment Horizon: Medium Duration Plans come with Macaulay duration of 3 to 4 years which defines the investment horizon for suitable investors
- Tax Efficiency: These funds are more tax-efficient than Bank Fixed Deposits. Because of the 3-year investment tenure, the funds give indexation benefits
Things to be considered before investing in Medium Duration Mutual Funds
Given below are some important factors which must be considered before finalising investments in Medium Duration Funds-
- Financial Objective
The first and foremost factor is your Financial Objective/Goal. Your investments and choice of funds is what helps you fulfill your financial requirements. Thereby, if you are planning to place your idle cash for a short-term, you can choose to invest in liquid funds. However, if you want to invest for some financial goal such as buying a car, or educational expenses, etc. you can definitely invest in Medium Duration Funds
- Investment Horizon
Now, what is your investment horizon? If you are comfortable investing for more than 3 years, you can choose medium duration debt funds. Otherwise, for investors with 3 months to 1 year investment horizon, liquid funds are best
Related Blog: Best Liquid Funds for 2020
- Risk Appetite
Medium Duration Debt Funds are not entirely risk-free. Such funds have some internal risks associated with them like Credit Risk and Interest rate risk. Credit risk occurs when the portfolio has assets allocated in low-credit rating securities. And, Interest rate risk occurs when a change in interest rate negatively affects the price of bonds. Before investing in these funds, you must take sufficient time to analyse if you have moderate risk tolerance, what is the credit rating of the securities, etc.
- Costs Involved
Debt funds give lower returns as compared to equity mutual funds. Consequently, it becomes very important to invest in a fund which has a low expense ratio. Moreover, there are debt funds which charge an exit load to prevent premature withdrawals. To save on Expense Ratio and Exit load, you must be careful while picking up the right debt fund for investment
Who should invest in Medium Duration Funds?
Medium Duration Funds are enlisted under the best investment options for the investors who are planning to invest their resources over a period of 3 to 4 years. These mutual funds are also regarded as the notable replacement of medium to long term fixed deposits.
- Taxation on debt mutual funds depends on the holding period of the fund units. If an investor redeems the fund units before 3 years of investment, Short Term Capital Gains (STCG) Tax, as per the income tax slab of the investor is levied
- For instance, If an investor has made a capital gain of ₹50,000 on investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor. ₹50,000 would be added to the taxable income of the investor and taxed accordingly
- If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation. Indexation reduces the value of overall Long Term Capital gains to reflect the effect of inflation on your investment
List of Best Medium Duration Funds
Here are top 10 medium duration funds which you may consider for investments in 2020:
|Fund Name||AUM (Crores)||3 Year Returns||5 Year Returns|
|SBI Magnum Medium Duration Fund||Rs. 2,752||9.41||9.99|
|Kotak Medium Term Fund||Rs. 3,278||7.75||9.11|
|ICICI Pru Medium Term Bond Fund||Rs. 6,518||8.22||8.86|
|HDFC Medium Term Debt Fund||Rs. 1,242||8.22||8.70|
|L&T Resurgent India Bond Fund||Rs. 1,747||7.58||8.83|
|Axis Strategic Bond Fund||Rs. 1,238||8.28||8.75|
|IDFC Bond Medium Term Fund||Rs. 2,951||8.08||8.53|
|DSP Bond Fund||Rs. 886||7.78||8.05|
|Sundaram Medium Term||Rs. 79||7.87||7.68|
|UTI Medium Term Fund||Rs. 217||6.88||–|
(Data as on 12th February, 2020; Source- Value Research)
Investing in Debt Funds
Some of the fund advisors debate about short-term schemes and fixed income plans being more benefiting for the investors. However, debt-oriented mutual funds are still deemed suitable for conservative investors. These types of funds allow the investor to withdraw from the investment at any point of time, letting the rest of the amount to be invested. Funds with a medium maturity period enables the investors to meet their financial goals within 3 to 4 years.