Top 10 best-performing medium to long-duration funds; Should you invest
Medium to long-duration funds offer a balance between risk and return, making them a viable option for investors aiming for a diversified portfolio
Investing in Debt Funds has gained popularity in India as more investors seek stable returns with relatively lower risk compared to equities. Among the various categories of debt funds, medium to long-duration funds stand out for those looking to invest with a time horizon of three to seven years. These funds offer a balance between risk and return, making them a viable option for investors aiming for a diversified portfolio.
What are medium to long-duration funds?
Medium to long-duration funds are debt mutual funds that invest in a mix of government securities, corporate bonds, and other fixed-income instruments. The defining characteristic of these funds is their duration, which typically ranges from three to seven years. The duration of a fund is a measure of its sensitivity to interest rate changes; the longer the duration, the more sensitive the fund is to interest rate fluctuations.
Why consider medium to long-duration funds?
1. Interest Rate Trends: These funds can be particularly beneficial in a declining interest rate environment. As interest rates fall, the price of bonds rises, leading to capital gains for bondholders. Medium to long-duration funds, with their longer maturity profile, stand to benefit more from such capital gains compared to shorter-duration funds.
2. Better Returns Compared to Short-Term Debt Funds: While short-term debt funds are less sensitive to interest rate changes, they generally offer lower returns. Medium to long-duration funds, due to their higher duration, have the potential to deliver better returns in a favourable interest rate environment.
3. Diversification: For investors looking to diversify their portfolio beyond equities, medium to long-duration funds offer exposure to high-quality debt instruments. This can reduce overall portfolio risk, especially during periods of equity market volatility.
Recent Market Trends
As of 2024, the Indian economy is witnessing a phase of fluctuating interest rates. The Reserve Bank of India (RBI) has been managing inflation and economic growth through a mix of interest rate hikes and pauses. In such a scenario, medium to long-duration funds have shown resilience, with some funds delivering annualised returns of 7-9 per cent over the past three years.
In 2023, India saw a series of interest rate hikes, which initially dampened the returns of medium to long-duration funds. However, as the market began to anticipate a pause or reversal in rate hikes, these funds started to recover, showcasing their potential in changing interest rate cycles.
Risks to Consider
While medium to long-duration funds have their advantages, they are not without risks:
- Interest Rate Risk: The primary risk for these funds is interest rate risk. If interest rates rise, the prices of bonds in the fund's portfolio will fall, leading to potential losses. This risk is more pronounced in funds with longer durations.
- Credit Risk: Although medium to long-duration funds typically invest in high-quality debt instruments, there is still a risk of credit downgrades or defaults, especially in corporate bonds.
- Market Volatility: The value of these funds can also be affected by broader market volatility, particularly if there is uncertainty about future interest rate movements.
List of top 10 best-performing medium to long-duration funds
|
Fund Name
|
AuM (Cr)
|
1-Year Return
|
3-Year Returns
|
5-Year Returns
|
10-Year Returns
|
|
UTI Medium to Long Duration Fund
|
301.09
|
8%
|
11%
|
7%
|
7%
|
|
Nippon India Income Fund
|
337.75
|
9%
|
7%
|
7%
|
9%
|
|
Kotak Bond Fund
|
2,058.84
|
9%
|
7%
|
7%
|
8%
|
|
ICICI Prudential Bond Fund
|
2,959.73
|
9%
|
7%
|
7%
|
8%
|
|
SBI Magnum Income Fund
|
1,781.39
|
8%
|
6%
|
8%
|
9%
|
|
LIC MF Medium to Long Duration Fund
|
172.40
|
9%
|
6%
|
6%
|
7%
|
|
Aditya Birla Sun Life Income Fund
|
1,921.63
|
8%
|
6%
|
7%
|
8%
|
|
HDFC Income Fund
|
843.81
|
9%
|
6%
|
6%
|
8%
|
|
Canara Robeco Income Fund
|
114.67
|
9%
|
6%
|
6%
|
8%
|
|
HSBC Medium to Long Duration Fund
|
46.84
|
9%
|
5%
|
6%
|
7%
|
*Data as of August 13, 2024
Who Should Invest?
Medium to long-duration funds are suitable for:
- Investors with a medium to long-term horizon: If you plan to invest for three to seven years, these funds can be a good option.
- Risk-Averse Investors: Those looking to diversify their portfolio with lower-risk investments can benefit from the relatively stable returns of these funds.
- Income Seekers: Investors seeking regular income through Systematic Withdrawal Plans (SWPs) may find medium to long-duration funds attractive.
Disclaimer: The article is for informational purposes only and not investment advice.