“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it.” – Albert Einstein.
If you’re an investor who wants to make the most of the power of compound interest, medium-duration mutual funds may be worth considering. In this blog, we’ll explore what medium-duration mutual funds are, their benefits and drawbacks, and how they can fit into your investment portfolio.
Medium duration funds are part of the debt fund category. The duration of these funds is longer than short term funds and lower than long term funds. Medium duration funds have a duration between 3 to 4 years i.e., the maturity of funds in this category is between 3 years and 4 years.
These funds are usually preferred by investors looking for a dynamic investment option for a period of 3 to 4 years that provides better returns than traditional investment options like short term or long term bank deposits. These funds tend to provide better returns in a falling interest scenario. The returns are subject to higher volatility as the funds’ duration is higher compared to low duration or ultra short term funds or liquid funds.
The fund manager in the case of medium duration funds invests in securities that have a duration of 3 to 4 years. These instruments can be money market instruments or debt securities that have similar duration. Upon maturity, these funds are redeemed by the investors and they are liable to pay a capital gains tax on such funds.
Medium duration funds are ideal for investors with an investment horizon of 3 to 4 years. This duration allows the returns to be more or less stable but the returns are not guaranteed. The risk parameters of these funds are also not too high. The returns are subject to less volatility as compared to long-term funds. Medium duration funds are better than many traditional investment options like banks deposits of similar tenure.
The risks in medium duration funds are the credit and interest risks that are part of every debt fund. Investors have to be aware of their risk appetite before investing in these funds.
The basic advantages and risks associated with medium duration funds are mentioned below.
The benefits of investing in medium duration funds are,
The risks of investing in medium duration funds are,
Credit risk is the risk of default by the issuer of the debt instrument at the time of maturity. This risk is associated with every debt fund. The degree or severity of the risk depends on the underlying investments of the fund. If the fund has invested in low rated debt instruments in the bid to gain higher returns such funds are subject to higher credit risks and vice versa. It is, therefore, necessary to check the underlying investments of any fund before investing in them to ensure that the debt instruments are of AAA or A+ category to minimize the credit risk/
Interest rate risk is the risk of interest rate fluctuations. This risk again is part of every debt fund but the severity of the risk depends on the tenure of the fund. Funds with shorter tenure have lower interest rate risk as compared to funds with medium to long term durations. In the case of medium duration funds, interest rate risk is higher as compared to liquid funds or low duration funds.
Liquidity risks are the risk that the fund may not be able to redeem the funds at the time of maturity. It is prudent to invest in consistently performing funds in this category and funds belonging to well known fund houses to minimize this risk.
Medium duration funds are part of the 16 types of debt funds in India. These funds are therefore taxed along the lines of debt funds. Investors are liable to pay short term and long term capital gains tax on the medium duration funds. The rate of taxation and the period of holding is explained in the table below.
| Type of gain | Duration/period of holding | Tax rate |
| Short term capital gains | Less than 3 years or 36 months | At the applicable income tax slab rates of the investor |
| Long term capital gains | More than 3 years or 36 months | 20% after the benefit of indexation (10% without indexation) |
In addition to the capital gains tax, the dividends received from medium duration funds are also taxed in the hands of the investors. These dividends are added to the taxable income of the investor and taxed at the applicable income tax slab rates depending on the gross total income.
There are several factors to be considered while making an investment decision in medium duration funds. Some of such factors are highlighted below.
Investors have to be aware of the risks of investing in medium duration funds. These funds are ideal for investors with a lower risk appetite as compared to aggressive investors.
The returns of medium duration funds are relatively stable but not guaranteed. They can provide higher returns as compared to long-duration funds and other traditional investment options like bank deposits.
The expense ratio is another important factor to be considered by any investor. A higher expense ratio will reduce the bet returns generated by a fund. Hence it is advisable to invest in medium duration finds with lower expense ratios and higher returns.
The investment horizon of the investor should be in line with the medium duration funds. These funds are of the duration of 3 to 4 years and make an excellent investment opportunity in this segment.
Past performance of the fund also has to be reviewed by the investors before making the investment decisions. This will help them understand the investment strategies of the fund managers and decide if they are in line with the risk-return parameters of the investors.
Medium duration funds can be used to meet the medium term financial goals of an investor. An investment made with careful analysis of the risk-return ratio as well as expenses will help the investor build a corpus fund that can be used to meet the medium term goals like travel purchase of a new vehicle, home repairs and renovation, etc.
The top funds in this category a few related details are discussed hereunder.
Axis Strategic Bond Fund is a medium duration fund with maturity between 3 to 4 years. This is an open-ended fund and launched in 2013. The details of this fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Devang Shah |
| Launch date | 1st January 2013 |
| Minimum SIP investment | Rs. 1,000 |
| Expense ratio | 0.39% |
| Risk | Low |
The returns provided by the fund as of 21st August 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 3.90% | 8.01% | 8.73% | 8.49% | 9.23% |
HDFC Medium Term Debt Fund is a medium duration fund with maturity between 3 to 4 years. This is an open-ended fund and launched in 2013. The details of this fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Shobhit Mehrotra |
| Launch date | 1st January 2013 |
| Minimum SIP investment | Rs. 1,000 |
| Expense ratio | 0.59% |
| Risk | Low |
The returns provided by the fund as of 21st August 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 4.21% | 8.54% | 9.25% | 8.34% | 8.87% |
(https://www.fisdom.com/fund/kotak-medium-term-direct-growth/isin/INF174K01VQ5)
Kotak Medium Term Growth is a direct plan under the medium duration fund category having a maturity of 3 to 4 years. This is an open-ended fund and launched in 2014. The details of this fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Deepak Agrawal |
| Launch date | 25th January 2014 |
| Minimum SIP investment | Rs. 1,000 |
| Expense ratio | 0.57% |
| Risk | Low to Moderate |
The returns provided by the fund as of 24th August 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 4.63% | 9.38% | 7.91% | 7.78% | 9.14% |
(https://www.fisdom.com/fund/sbi-magnum-medium-duration-fund-direct-growth/isin/INF200K01VB0)
SBI Magnum Medium Duration Fund is a direct plan from SBI Mutual Funds in the medium duration fund category. The aim of the fund is to provide better returns than other investments of similar duration i.e., a maturity between 3 to 4 years. This is an open-ended fund and launched in 2013. The details of this fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Dinesh Ahuja |
| Launch date | 29th January 2013 |
| Minimum SIP investment | Rs. 1,000 |
| Expense ratio | 0.68% |
| Risk | Low |
The returns provided by the fund as of 24th August 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 3.58% | 7.93% | 10.03% | 9.61% | 9.95% |
Medium duration funds are among the many investment options available under the debt fund category. These funds can potentially generate higher returns than lower duration funds like liquid funds, ultra short term funds as well as traditional investment options like a bank savings account, bank deposits (recurring or fixed).
1. What are the debt instruments that are invested under medium duration funds?
A. Under debt instruments, investments can be made in any of the following securities,
2. What is the duration under medium duration funds?
A. The duration of medium duration funds is between 3 to 4 years.
3. Is there any exit load on medium duration funds?
A. The levy of exit load is usually as per th4 guidelines of the fund house. Many fund houses may or may not levy any exit load on the redemption of units. Exit load is usually applied on units redeemed within one year of the initial investment.
4. What is the average returns expectations under medium duration funds?
A. The average returns expectations under medium duration funds within a year of investment is approximately around 8% depending on the fund performance.
5. Can medium duration funds be invested through the Fisdom app?
A. Yes. Investors can invest in one or more medium duration funds through the Fisdom app by logging into the app and building a portfolio for the same.
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