Debt offers a plethora of options to conservative investors. With SEBI classifying debt funds into 16 categories, it is now easier for investors to find a debt fund that suits their investment objectives.
Since debt funds invest in instruments that facilitate the buying and selling of loans, the duration of investment plays an important role in ascertaining returns. As an investor, your investment horizon should match up with the maturity of the debt fund for maximum benefit. Here, we will explore what medium duration debt funds have in store for investors.
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Medium Duration Funds invest in debt securities and money market instruments so that the Macaulay Duration of the fund's portfolio is between three and four years. Hence, these funds are often opted by conservative investors with a four-year investment horizon.
Duration Funds have a higher maturity than overnight funds, liquid funds, ultra-short-duration funds, low-duration funds, money market funds, and short-duration funds but lower maturity than medium to long-duration funds and long-duration funds. These funds are best suited for investors who want to meet certain financial goals in around 3 years. The average returns of these funds usually range between 7% and 9%.
The main characteristics of medium duration debt funds are:
a) Maturity: These funds have a maturity duration typically ranging from 3 to 4 years. They provide a risk-return profile that finds a balance between short-term and long-term investing possibilities.
b) Liquidity: Medium-duration funds are more liquid than long-term funds, allowing investors to rapidly access their cash.
c) Diversification: Medium duration debt funds spread risk by investing in diverse debt instruments.
d) Tax-Efficient: Capital gains from debt mutual funds held for more than three years are taxed at a lower rate, making them tax-efficient long-term investments.
The fund manager of a medium-duration fund selects money market instruments and debt securities according to the investment objective of the fund, ensuring that the Macaulay duration is between 3 and 4 years.
You can begin investing in a mutual fund scheme in several ways. One can invest in mutual funds by delivering a correctly filled application form to the approved Investor Service Centres (ISC) of Mutual Funds or Registrar and Transfer Agents of the appropriate Mutual Funds, together with a cheque or bank draft.
Apart from this, you can also invest online through Groww's application.
You can invest in these funds for the benefits mentioned below:
a) Income Source
Medium-duration funds invest in bonds and financial instruments with maturities ranging from three to seven years, delivering a steady income stream from interest and dividend payments.
b) Diversification
Medium-term funds invest in a wide range of fixed-income securities, including government bonds, corporate bonds, and other debt instruments. This diversification spreads risk and mitigates the impact of a poor-performing asset.
c) Moderate Risks
These funds provide a balanced risk-reward profile by combining short-term and long-term funds. They are less vulnerable to interest rate fluctuations than long-term funds, making them a more reliable investment alternative.
The taxation of debt mutual funds is determined by the fund units' holding period. If an investor redeems the fund units before three years of investment, Short Term Capital Gains (STCG) Tax is applied based on the investor's income tax bracket.
If an investor withdraws his or her investment, including capital gains, after three years, a 20% Long Term Capital Gains Tax is levied, with the advantage of indexation. Indexation reduces the overall value of long-term capital gains to reflect the impact of inflation on your investment.
Q1. What are medium-duration mutual funds?
These mutual funds invest in bonds/debt so that the portfolio's average maturity (remaining) period is between 3 and 4 years (Macaulay duration).
Q2. How can you invest in medium-duration funds?
You can invest in these funds through Groww or directly through the specific mutual fund’s official website.
Q3. What is the risk of investing in medium-duration mutual funds?
The most crucial risks are interest and credit risks.
Q4. What is the major benefit of investing in medium-duration mutual funds?
The major benefits of this medium-duration fund are low volatility, low risk, and stable returns.
Q5. Who are medium-duration mutual funds suitable for?
It is suitable for investors looking for an alternative to bank deposits who want to invest for 1-3 years.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
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