Medium to Long Duration debt funds invest in debt and money market instruments. The underlying assets in these funds have an average maturity of 4 to 7 years.
These funds can cater to your medium-term financial goals such as- upgrading a car in the next few years, planning a wedding, or a family vacation abroad.
Medium to Long duration funds may deliver superior returns compared to short, low, medium duration funds.
Here’s everything you need to know about these funds.
As per SEBI guidelines, these funds invest in debt and money market instruments keeping the Macaulay Duration to 4-7 years.
What Is Macaulay Duration?
It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.
In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.
Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.
If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.
These funds have a longer horizon than medium and low duration debt funds. Therefore, the risk could be higher. However, the chances of generating superior returns are also high.
The fluctuations in interest rates are inevitable in 4-7 years of duration. The bond prices will fall during the rising interest rates. However, it will climb back up when the interest rates are falling.
Being patient is the key to fighting the interest rate risk.
Debt funds may also come across default risk. To avoid it, invest in funds having underlying bonds with high credit ratings. Bonds with AA+ credit ratings are safe to invest in.
Medium to Long Duration debt funds tend to deliver superior returns than FD of the same tenure. These funds also outperform debt funds with short, low, or medium tenure.
You may need to stay invested in these funds for at least 4 years to earn higher returns. Invest only if you are comfortable with 4-7 years of horizon before investing.
Otherwise, you can explore low or medium duration funds for a shorter horizon. Or, long duration funds for a longer horizon. Whichever suits your financial goals.
As per new tax rules from April 2023:
Investors have to pay tax as per their tax slab on both Long-term Capital Gains (investment redeemed after 36 months) and Short-term Capital Gains(Investment redeemed before 36 months).
The old indexation benefit will only be applicable to hybrid funds with more than 35% exposure to equity.
These funds are suitable for investors looking to park their money for 4-7 years. Since debt funds carry lower risk than equity funds, they can bring stability to the portfolio.
Go for these funds if you can accept a slight risk for better returns than fixed deposits. If you have an expense planned within 7 years, these funds can accompany you.
However, don’t forget to evaluate your risk appetite and portfolio requirements before investing in any funds.
Debt funds have 15 different categories with variable objective and tenure. Medium to Long duration funds make planning financial goals within 7 years quite easier.
You can go with short duration or medium duration funds for a slightly lower horizon. Or long duration funds for 7+ years of financial planning.
Explore all categories of debt funds before planning your investments. Take into account the risks and potential rewards.
If you have any questions, reach out to VNN Wealth advisors for more information.
