Best Medium Duration Funds : Top Performing Medium Duration Mutual Funds to Invest in 2021

Best Medium duration funds are open-ended debt schemes that invest in debt securities and money market instruments. The portfolio has a Macaulay duration of three to four years. You could find medium duration funds having a higher maturity period as compared to low duration funds.


Introduction to Best Medium Duration Funds

Medium duration funds as the name suggests, invest in debt securities with a maturity period of between three and four years. The fund seeks to generate a higher return as compared to low duration funds. You may consider medium-term funds to be volatile in a changing interest rate scenario. Medium duration funds offer a higher return in a falling interest rate regime.


Top 10 Best Medium Duration Funds

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

Mutual fund 5 Yr. Returns 3 Yr. Returns Min. Investment Rating

Who should invest in medium duration funds?

You may consider investing your money in medium duration funds if you have an investment horizon of three to four years. It may offer a greater return as compared to liquid funds and low duration funds. You could invest in medium duration funds to achieve medium-term financial goals. You could diversify your portfolio with a fixed-income investment to protect it from the volatility of the stock market. You may consider investing in medium duration funds to generate a return through the combination of interest-earning and capital gains. The return from medium duration funds may be higher as compared to bank fixed deposits over a similar tenure. You may consider putting money in medium duration funds if you are willing to accept moderate risk for regular income. However, the fund manager invests in debt securities of a lower rating to earn a higher return for the portfolio. You may consider investing in medium duration funds if you want a tax-efficient investment as compared to bank fixed deposits.


Taxability of medium duration funds

Medium duration funds are taxed in a similar way as debt funds. The short-term capital gains (after a holding period below three years) are taxed depending on your income tax bracket. The long-term capital gains (after a holding period of three years and above) are taxed at 20% with the benefit of indexation. You may consider the indexation benefit to increase the purchase price of the medium duration fund to adjust for inflation. The dividends you earn from medium duration funds are added to your taxable income. You have to pay taxes depending on your income tax bracket. You could earn a tax-efficient income as compared to fixed deposits if you fall in the higher income tax brackets.


Risks associated with medium duration funds

You may find medium duration funds investing in securities of a lower credit rating to earn a higher interest. It increases the chances of you suffering a loss on a downgrade or a default on the lower-rated securities. Lower rated paper cannot be redeemed at a fair valuation during periods of tight liquidity. Medium duration funds are vulnerable to interest rate risk. You may find higher interest rates affecting the value of the fund. Medium duration funds have a Macaulay duration of three to four years. It is affected by the changing interest rate cycle due to longer maturity periods.


Things to consider before investing in medium duration funds

  • Investment Objectives: You may invest in medium duration funds only if it matches your financial goals. For example, medium duration funds may help you achieve medium-term financial goals, such as buying a car. You may consider liquid funds to fulfil your short-term financial goals.
  • Time Horizon: Medium duration funds have a Macaulay duration of three to four years. You may consider these funds only if you can invest your money for a longer period. Risk Profile: Medium duration funds are affected by both credit risk and interest rate risk. You may consider investing your money only if you are willing to bear a moderate risk for regular income.
  • Track Record: You could diversify your portfolio with medium duration funds. You may consider checking the expense ratio of the fund and the investment style of the fund house. Select the fund only after checking the track record of the AMC (asset management company) and the performance of the scheme against a benchmark.
  • Check the fund fact sheet: You could take a look at the fund fact sheet to check the portfolio of the medium duration scheme. Check the credit rating of the debt securities in the portfolio to see if there is excessive exposure to a few bonds. The portfolio must have a good mix of highly liquid securities to withstand a sudden redemption pressure.

Advantages of investing in medium duration funds

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

  • You may invest in medium duration funds to achieve your medium-term financial goals.
  • It helps you get regular income over some time.
  • You get a higher return as compared to a low duration fund and a liquid fund.
  • It offers a higher return as compared to bank fixed deposits over the same duration. Investors in the higher income tax brackets may get a tax-efficient return.