10 Best Medium Duration Debt Funds

Mutual funds

Medium Duration Debt funds are specifically those mutual funds that exclusively invest in medium duration debt securities (debt instruments with a duration of 3-4 years), with the primary objective to ensure the stability of returns. 

The goal of these funds is not to generate the highest returns possible, but rather to minimize volatility, and safeguard the capital that you’ve generated over the course of your investment journey. 

Read on to know about the 10 best medium duration debt funds in India, who should invest, tax implications, returns and risks. 

Top 10 Best Medium Duration Debt Funds in India

Also Read: 10 Best Mutual Funds To Invest In India with High Return [2022]

Who Should Invest In Medium Term Funds

If you’re someone with a moderate risk appetite, and are looking to protect the wealth that you’ve already generated while still earning a healthy return, medium-term debt funds are for you.

These are great alternatives to fixed deposits, or other savings schemes, as they tend to generate higher returns. It is suitable for people looking to earn a steady return over a medium tenure.

Here are 4 tips to keep in mind before investing in medium-term debt funds:

1. Investment Goals – It is important that you ask yourself why you’re investing in these medium-duration funds. Being aware of the end goal will allow you to select appropriate plans that will help you achieve your objectives during your preferred time span. 
2. Risk Appetite: Typically, investments that generate higher returns tend to be highly risky as well. Market volatility, risk of default, and risk of bankruptcy are some of the common risks associated with investments in the stock market. It is important to gauge your risk appetite before investing in mutual funds. In the case of medium duration debt funds, your return expectation should be low, as it is best suited for people with a conservative risk appetite. 
3. Previous Performance Of The Fund: While Past performance is not an indicator of future performance, it can help you gauge how successful a fund tends to be over the years, and as such, it is important to consider before investing in a medium-term debt fund. 
4. Exit Loads & Expense Ratio: An important factor to look at is the exit load charged by the different Asset Management Companies. AMCs tend to levy an additional charge if you choose to leave the scheme before a specified date, as mentioned on the scheme documents. The expense ratio is a small percentage of the fund’s assets that are utilized to manage the different expenses of the Asset Management Company. Ensure that the medium-term debt fund you’re investing in has a low expense ratio (as even a 1% expense ratio can cause a significant impact on your returns, over time).
   

Taxability Of Medium Duration Debt Funds

Medium Term Debt Funds are taxable just like any other mutual fund investments.

• Long Term Capital Gains Tax – Should you sell the units of your Medium duration funds after 3 years of the date of acquisition, you will attract Long Term Capital Gains Tax. You have the option to pay 10% of the gains, should you opt-out of the indexation benefit, or 20% if you choose to exercise the indexation benefit. We encourage you to calculate taxes on both options and choose which the best one is for your sale proceeds. 
• Short Term Capital Gains Tax – Should you sell the units of your medium duration funds before 3 years of the date of initial investment, you are liable to pay short-term capital gains, based on your tax bracket.

Also Read: What Is 80C, And How Mutual Funds Can Help In Claiming Tax Exemptions Under This Section?

Risks Involved In Medium Duration Debt Funds

As with all investments, Medium Term funds also come with associated risks. These medium-term funds are usually considered conservative (moderate risks) and come with lesser risk, as compared to Equity funds. 

• The risk of volatility is low – The instruments these funds invest in carry a fixed rate of return, and as such don’t have high levels of volatility. 
• The risk of interest rate fluctuations – The risk of interest rate fluctuations is higher when compared to short-duration funds, but lower when compared to long-duration funds. 
• The risk of default – The risk of default is dependent on the individual investments that the fund chooses to invest in. Please read all the scheme-related documents carefully, and thoroughly understand the risks before investing your hard-earned money into any medium duration mutual fund.  

Return Potential Of Medium Duration Debt Funds

These mutual funds usually generate a healthy return of around 6% annually. While you can’t expect to beat inflation rates, you can consistently attempt to match the inflation rate of our country. 

Compared to other investments, like fixed deposits and other savings schemes (which average about 4% return on investment), Medium duration mutual funds are considerably more attractive.

Benefits Of Investing In Medium Duration Debt Funds

1. Low Risk
   Medium duration funds are much less risky than Equity schemes and equity-oriented investments. Act as a wonderful instrument for diversification and hedge against market volatility. 
2. Long-Term Suitability
   Medium Duration funds are perfect for the long term (no pun intended). If you’re searching for an instrument with a higher rate of return than bank deposits, medium-duration funds are made for you. 
3. Mode Of Investments
   You can incest in medium duration funds as a lump sum, or through Systematic Investment Plans. Medium duration funds are perfect to build the financial discipline of investing through SIPs, as they are safe for beginner investors, and generate healthy returns over a wide range of time. 

Final Word

Medium duration funds are great if you want to generate wealth, minimize volatility, and safeguard the capital. Set a goal and research the past performance of the fund before investing. While there are many benefits to investing in medium-duration funds, it is also subject to market risks and tax. Talk to a seasoned expert or visit Navi Mutual Fund to start investing. 

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.