Best Long duration funds are debt funds that invest in long-term fixed-income securities. It invests in debt and money market instruments with a Macaulay duration of above seven years. Long duration funds pick bonds with an average maturity period of more than seven years as per the SEBI mandate.

1. Introduction to Long Duration Funds

Long duration funds are open-ended mutual funds that invest predominantly in government and corporate bonds with a longer residual maturity period. It generates returns from both interest income and capital appreciation from the securities in the portfolio. However, these funds are riskier as compared to most debt funds. The fund manager of a long duration fund selects bonds with a Macaulay duration of more than seven years. It could offer a higher return as compared to medium duration funds in a falling interest rate scenario.

2. Top Long Duration Funds

The table below shows the top-performing long duration funds based on 3-year and 5-year returns:

 

Fund

3-Year Returns

5-Year Returns

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ICICI Prudential Long Term Bond Fund Growth

9.73%

9.74%

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3. Who Should Invest in Long Duration Funds?

You may consider investing in long duration funds if you are willing to bear short-term volatility and stay invested for the long-run. It could offer a higher return as compared to most debt funds as it invests in bonds of a longer duration. You could invest in long duration funds if you are willing to bear the risk of fluctuating interest rates for a higher return. You may consider investing in long duration funds with a time horizon of three to five years. It may help you achieve medium-term financial goals. Long duration funds invest in a mix of government and corporate bonds of a longer duration. It could also invest in money market instruments. Long duration funds are more volatile as compared to short-term debt funds which focus mainly on coupon income. It generates a higher return when interest rates are expected to fall. The interest income is augmented by capital gains to offer a better return as compared to most debt funds.

4. Taxability of Long Duration Funds

Long duration funds are taxed in a similar manner to debt funds. The short-term capital gains after a holding period below 36 months are added to your taxable income. It is taxed based on your income tax slab. The long-term capital gains after a holding period of 36 months or more are taxed at 20% with the indexation benefit. The benefit of indexation helps you to inflate the purchase price of the long duration bond to adjust for inflation. The dividends from long duration funds are added to your taxable income. You may have to pay taxes depending on your income tax slab. You may earn a tax-efficient income as compared to bank fixed deposits if you fall in the higher income tax brackets.

5. Risks associated with Long Duration Funds

Long duration funds have a higher degree of interest rate risk as compared to medium and short duration funds. It is quite sensitive to changes in interest rates as it invests the bulk of the corpus in bonds of a longer duration. Long duration funds are affected by the rising interest rate scenario as bond prices fall. Long duration funds may invest in both government and corporate bonds of a longer duration. However, long duration funds are affected by credit risk. It increases the chances of a loss on default or a downgrade of lower-rated securities.

6. Things to Consider Before Investing in Long Duration Funds

  • Investment Objectives: You may invest in long duration funds only if you can stay invested for the long-run. It may help you achieve medium-term financial goals.
  • Time Horizon: You could consider investing in long duration funds with a time horizon of three to five years.
  • Risk profile: Long duration funds are riskier as compared to many debt funds. It invests in bonds of longer duration, which makes it vulnerable to interest rate fluctuations.
  • Return: Long duration funds may offer a higher return as compared to medium duration funds. It invests in bonds of a longer residual maturity and could generate a higher return in a falling interest rate scenario.
  • Expense Ratio: You may consider checking the expense ratio of the long duration fund. A higher expense ratio may eat into the return of the fund.

7. Advantages of investing in Long Duration Funds

The following are a few benefits of investing in long duration funds:

  • You may earn a higher return as compared to many debt funds.
  • Investing in these funds is a good option to achieve medium-term goals.
  • It offers a higher return as compared to bank fixed deposits. It may also offer a higher tax-efficient return for investors in the higher income tax slabs.
  • You could consider diversifying your portfolio with long duration funds. It offers stability against the volatility of the stock market.