The Medium Duration Mutual Funds constitute an important component of the investment choices in India, particularly, among the investors who concentrate on fixed income. These funds attempt to balance the level of risk and returns to offer moderate growth chances to investors to invest over a medium-range investment horizon. Investors should be aware of these funds in case they are planning to diversify their portfolios in different time frames and medium-risk mutual fund levels. This article explores the uniqueness of Medium Duration Mutual Funds, how these Mutual Funds work, and why someone may be interested in investing in them.
What Are Medium-Duration Mutual Funds and How Do They Work?
Medium Duration Funds invest in Money Markets and bonds but, the Macaulay Duration of the portfolio remains between three and four years. Due to that aspect, such funds are frequently selected by conservative investors with a four-year investment strategy. Duration Funds are more long-term in comparison to overnight funds, liquid funds, ultra-short-duration funds, low-duration funds, money market funds, and short-duration funds, but shorter term than medium to long-duration funds and long-duration funds. These investments are suitable when investors want to attain certain financial objectives within approximately three years. In general, these funds have an average return that ranges anywhere between 7% and 9%.
Key Features of Medium Duration Mutual Funds You Should Know
Major characteristics of medium duration debt funds are:
- a) Maturity: The maturity of these funds is normally 3 to 4 years. They provide a risk-return profile which balances the long run and short run investment opportunities.
- b) Liquidity: Medium duration funds are liquid compared to the long-term funds which will ensure the investors are able to access their money quickly.
- c) Diversification: Medium duration funds are low risk because they invest in a wide range of debt securities.
- d) Tax-Efficient: Being a long-term investment, Capital gains of debt mutual funds are taxed at a lower rate compared to those of short-term investments hence making them a tax-efficient option.
Why Medium Duration Funds Are Ideal for 3-4 Year Investment Goals
Depending on the investment objective of the fund, the fund manager of a medium-term fund selects money market instruments and debt securities such that the Macaulay duration is between 3 to 4 years.
How to Invest in a Medium Duration Mutual Fund?
You can start investing in a mutual fund scheme in a few different ways. One option is to submit a properly filled application form to the authorised Investor Service Centres (ISC) of Mutual Funds or the Registrar and Transfer Agents of the relevant Mutual Funds, along with a cheque or bank draft.
Top Benefits of Medium Duration Mutual Funds for Conservative Investors
The following are some of the benefits associated with investing in these funds:
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a) Source of Income
Medium-length funds invest in bonds and other financial instruments with a three to seven-year maturity, and they attract a steady flow of income through the payment of interests and dividends.
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b) Diversification
Medium-term funds invest in different fixed-income securities, which include government-issued bonds, corporate bonds and others that are of several types. The diversification assists in diversifying the risk and reducing the effects of an underperforming asset.
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c) Moderate Risks
Such funds provide an adequate risk-reward combination of short-term and long-term investment. Their sensitivity to interest rates is low relative to long-term funds and thus they give a more reliable source of investment.
Who Needs to Consider Investing in Medium Duration Mutual Funds?
Medium Duration Funds should be invested by investors who have a low to moderate risk profile and at least a 3 -4 year investment horizon. Such funds can even be a better alternative to a fixed deposit of the same tenure as they may have greater and more tax-saving yields. An investor who holds the funds for more than 3 years can enjoy a lower effective rate of taxation of 20 per cent after indexation benefits when selling the investments offered.(not sure)
Investors must however note that these funds are subject to interest rate and default risks. Since such funds have modified durations that are high, about 3-4 years, they tend to be significantly affected by changes in interest rates in the economy. There is a possibility of default risks caused by the low-rated securities that may form the portfolio to increase returns to the investors.
Advantages of Medium Duration Funds: Income, Diversification & Liquidity
There are several advantages of medium duration mutual funds and they are:
Stable Income: Medium-duration funds offer stable income in the form of interest received by debt securities, so it is an excellent option when a stable and constant income is required.
Risk and Reward Balance: These funds also provide attractive returns compared to short-term funds with much better management of interest rate risk compared to longer-term investments.
Diversification: There are different types of debt instruments and money market securities in which these funds are invested and this will aid in transferring risks and improve the total portfolio performance.
Liquidity: Since a medium-duration fund is allowed to hold securities which have a period of maturity of 3-4 years, a medium-duration scheme can be relatively liquid. The investor is able to receive their investments at a faster rate than other long-term investment facilities.
Major Risks of Investing in Medium Duration Funds
Medium risk mutual fund associated with several risks such as:
Interest Rate Risk: Since it is a debt fund, medium-duration funds have interest rate risk. Risk also depends on the period of investment. In the case of medium-duration funds, the risk is higher than that of short-term funds.
Credit Risk: Credit risk is the chance of default by the issuer. When the fund invests in securities with lower ratings it raises the chances of dealing with credit risk.
Inflation Risk: The medium-duration funds can also fail to keep up with inflation over time. On average these funds would bring a positive result with returns ranging between 7-9%, hence when inflation rates are high, this could bring zero to minimal returns.
Crucial Things to Check before Investing in Medium Duration Funds
Things to consider before investing in medium-duration funds
These are some of the factors that you need to consider before you invest in a medium-duration mutual fund:
Investment Horizon: Make sure that the average maturity of the fund is equivalent to the average length you will be investing in the fund.
Risk Tolerance: Medium-duration funds offer a balanced risk-reward profile, but they are not entirely free from risk. The interest rate changes and credit problems can influence them. Therefore, we need to consider the risk level of the fund.
Historical Performance: See what the fund has done in the past relative to its benchmark and other funds with similar characteristics to get an estimate as to what the fund can do.
Expense Ratios: The Expense ratio is the annual charge, charged by a fund company to run the fund. Check a list of expenses taken by the fund and compare it with the expense ratio of the funds available under the same category in order to get the most cost-effective option.
Experience: What has been the history of the fund manager? A good manager can adjust to the changes in the market, which may affect performance.
Conclusion
Medium Duration Mutual Funds may make a good investment option for someone who wants to have a balance between risk and an increase in value in the medium term. One should know the characteristics and operations of these funds, to make sound investment decisions. With more than 1000 mutual funds options available – including some of the Medium Duration Mutual Funds, finding the right type of investment plan and strategy to achieve your financial objectives starts with the Religare Online Platform.
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