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Due to this, they are likely to provide superior returns to investors. However, at the same time, the investment period also leaves these funds exposed to interest rate changes over the period, adding an element of risk that is higher than short or medium-duration funds.
The best Medium to Long-term Debt Funds generally delivers an average rate of return between 5-8%. These funds are best suited for investors who have a long-term investment plan and are willing to take a little extra risk for additional returns.
Before investing in Medium to Long-term Debt Funds, here are a few things you should know.
Are Medium To Long-term Debt Funds High Risk
Investments of all kinds carry some amount of risk. Before you invest, it is important to understand your risk appetite. In the investing world, the basic thumb rule is higher the risk, the higher the return. Increased risk can also mean a potentially large loss.
To put this in perspective, consider the following in increasing order of risk:
- Bank FD’s – Least risk
- Mutual Funds – Average risk
- Equities – Highest risk
In the Mutual Fund space, there are funds in debt, gilt, and equity funds. Debt is considered to be low risk in comparison to Equity.
Within Debt Mutual Funds there are Short Duration, Medium Duration, Medium to Long Duration, and Long-duration Debt Funds. The risk factor increases progressively as tenure increases.
Medium to Long-term Debt funds are susceptible to interest rate risk as they invest in debt instruments of a longer duration. Debt Funds have an inverse ratio to interest rates. So in case of an interest rate rise, these funds could lose value.
Medium to Long-term Debt Funds also carry the risk of the tenure itself (Macaulay duration of 4 to 7 years). Over the tenure of the fund, the interest rate can fluctuate which affects the maturity proceeds.
Returns on Medium to Long-term Debt Fund
An investor who is looking for better returns in comparison to low or medium-duration funds should consider these funds. The tenure for investment to be considered should be between 4 to 7 years.
These funds can help diversify your portfolio and protect you from market ups and downs. Returns generated by such funds are tax-efficient as they get the benefit of indexation.
Investors who generally invest in fixed deposits but are looking at other avenues to invest in should also consider Medium to Long-term Debt Funds. These funds help investors generate higher returns in a falling interest rate scenario.
The idea of investing is to grow your money over time. This needs to align with your financial goals as well as your risk appetite.
So, who do Medium to Long-term Debt Funds work for? These funds work for investors:
- Who does not want to incur the risk of investing in equities with volatility being a factor
- Would prefer better returns than bank deposits
- Have an investment horizon of 4 to 7 years.
On average, Medium to Long-term Debt Funds perform well and they are typically known to provide an average return of 5-8% pa.
Investing in Medium to Long-term Debt Funds
Medium to Long-term Debt Funds invests primarily in a mix of government securities, debt securities, and money market instruments. The fund manager of such funds is expected to invest in a portfolio of medium and long-duration bonds, to generate maximum return utilizing interest rate movements.
Debt securities and Money market instruments include instruments like, government securities, treasury bills, commercial paper, certificate of deposit, and non-convertible debentures among other instruments.
How Long to Invest in Medium To Long-term Debt Funds Fund with Nivesh
Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:
- Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
- On your portfolio page click on the Buy New tab at the right top corner of the screen.
- Select the category and choose the funds you want to purchase.
- If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
- Fill the transaction details and confirm. You can place up to 5 orders in one go.
- You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.
Taxability on Medium to Long-term Debt Funds
Like most investment instruments, the gains on Medium to Long-term Debt Funds are taxed. If the returns are received within 36 months of investment, short-term capital gain tax is applied to it and are taxed as per the investors income tax slab.
If returns are received after 36 months, 20% long-term capital gain tax is applicable with the benefits of indexation. However, the dividends, if any are received, they are added to the taxable income of the investor.
Frequently Asked Questions (FAQs)
1. Are Medium to Long-Duration Fund High Risk?.
Medium to Long-Duration Fund has a higher risk than short-term Debt Funds.
2. What is the Percentage of Returns can I Get from the Medium to Long-Duration Fund?
On average, you can receive anywhere between 5-8% interest on returns.
3. Where does Medium to Long-Duration Fund Invest?
Medium to Long-Duration Fund invests in debt securities and money market instruments like government securities, treasury bills, commercial paper, certificate of deposit, non-convertible debentures among other instruments.
4. How Long Should I Stay Invested in the Medium Duration Fund?
The Macaulay Duration of Medium to Long-term duration fund is between 4-7 years hence investors should target an investment horizon of 4-7 years while investing in these funds.
