Best Medium To Long Duration Mutual Funds

Best Medium to long duration funds are debt schemes that invest mainly in debt and money market instruments. The portfolio has a macaulay duration of between four to seven years. You may find medium to long duration funds having a higher maturity period as compared to medium and low duration funds.


Introduction to Medium to Long Duration Funds

Medium to long duration funds as the name suggests, invest in debt securities with an average maturity period of four to seven years. The fund seeks to generate a higher return as compared to medium and low duration funds.
You may find medium to long duration funds to be volatile during periods of fluctuating interest rates. Medium to long duration funds could offer a higher return in a falling interest rate scenario.


Top 10 Medium to Long Duration Funds

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

Fund 3-Year Performance 5-Year Performance Link

Who Should Invest in Medium to Long Duration Funds?

You could invest in medium to long duration funds if you have an investment horizon of four to seven years. It could offer a higher return as compared to both low duration and medium duration funds. You may invest in medium to long duration funds to achieve medium-term financial goals.
You may consider diversifying your portfolio with medium to long duration funds to protect it from the volatility of the stock market. It helps you earn return through a combination of interest-earnings and capital gains.
The return from medium to long duration funds may be higher as compared to bank fixed deposits over a similar tenure. It offers a tax-efficient income if you fall in the higher income tax brackets. You may consider investing in medium to long duration funds if you want a higher return in a falling interest rate scenario.


Taxability of Medium to Long Duration Funds

The medium to long duration funds are taxed in a similar way as debt funds. The short-term capital gains (after a holding period below 36 months) are taxed depending 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. You may consider the benefit of indexation to raise the purchase price of medium to long duration funds to adjust for inflation.
The dividends you earn from medium to long duration funds are added to your taxable income. You may have to pay taxes depending on your income tax slab. Prior to the Union Budget 2020, dividends were tax-free in the hands of the investor. Mutual fund houses would pay the dividend distribution tax (DDT) and then distribute the dividends to the investors.


Risks associated with Medium to Long Duration Funds

Medium to long duration funds are affected by interest rate risk. It could lose value if the interest rates are expected to rise. Medium to long duration funds have a macaulay duration of four to seven years. It is affected by the changing interest rate cycle due to a longer maturity period.
However, medium to long duration funds invest the bulk of the corpus in government securities. It would have very low credit risk as government bonds enjoy a sovereign rating.


Things to consider Before Investing in Medium to Long Duration Funds

  • Investment Objectives: You may consider investing in medium to long duration funds only if it matches your investment objectives. It is suitable for conservative investors who prefer a lower risk as compared to equity funds. You could invest in medium to long duration funds to achieve your medium-term financial goals.
  • Time Horizon: You could consider investing in medium to long duration funds only if you can invest for the long-term. Invest in these funds with a time horizon of four to seven years.
  • Risk Profile: Medium to long duration funds invest in government bonds of a longer duration. It is affected by interest rate fluctuations in the short-run.
  • Track Record: You may consider checking the portfolio of the medium to long duration fund. You could check the track record of the fund house and the investment style of the fund manager before investing in the debt fund.

Advantages of Investing in Medium To Long Duration Funds

The following are benefits of investing in high-risk mutual funds:

  • You could diversify your portfolio with medium to long duration funds. It protects the portfolio from the volatility of the stock market.
  • It could offer a higher return as compared to bank fixed deposits of a similar tenure. You may consider investing in these funds for tax-efficient return if you fall in the higher income tax bracket.
  • You may invest in medium to long duration funds if you seek a higher return as compared to low and medium duration funds.
  • You could invest in low and medium duration funds if you seek a regular income.