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 which facilitate 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 Medium Duration Mutual Funds and talk about all the important aspects that you need to know before investing in them.
In this article
What are Medium Duration Mutual Funds?
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 recommended to conservative investors with a four-year investment horizon. Medium 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 3 years and are a good alternative to bank deposits. The average returns of these funds range between 7 and 9%.
How do Medium Duration Funds work?
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.
Who should invest in Medium Duration Mutual Funds?
SEBI has now made it easier for investors to choose the right debt fund based on their investment plan. Since the Macaulay duration of the portfolio of a medium duration fund is between 3 and 4 years, it is best suited to investors with an investment horizon of little over three years and a lower risk preference. Further, these funds tend to offer better returns than a fixed deposit for a similar tenure. It is important to ensure that you invest according to your financial plan and investment objectives.
Factors to consider before investing in Medium Duration Mutual Funds in India
Here are some important aspects that you must consider before investing in medium duration funds in India:
Risks and Returns
A medium duration fund is basically a debt fund. Hence, like all other debt funds, these funds also carry the three risks – credit risk (or the risk of default by the issuer), interest rate risk (effect of an increase or decrease in interest rates on the value of the fund), and liquidity risk (of the fund house). Hence, it is important to ensure that you analyze the portfolio to ensure that the fund invests in high-quality debt securities so that the credit risk is negligible. Also, research the fund manager and check how he has performed through different interest rate regimes. An experienced fund manager can help you weather the storm of a rising interest rate period optimally. A well-managed medium duration portfolio should earn around 7-9% returns.
Expense ratio plays an important role in debt funds since the returns are already low. The expense ratio is a fee charged by the mutual fund towards fund management services and is denoted as a small percentage of the total assets of the scheme. A low expense ratio will imply a better chance to maximize your gains.
You need a well-thought over investment plan in order to meet your financial goals effectively. This means that you need a clear definition of your investment objectives, risk tolerance, and the period for which you would want to stay invested. Medium duration funds are good for conservative investors with 3-4 year financial goals. If you have shorter or longer goals, then look for schemes that suit your requirements adequately. Medium duration funds can offer returns in the range of 7 to 9%.