Best Medium Duration Funds Sorted by Last 3 Year Returns
About Medium Duration Mutual Funds
- Medium duration mutual funds (MDFs) are one of the popular categories of debt funds.In 2018, the Indian mutual fund industry went through massive rationalisation, resulting in the introduction of many new categories. Medium duration mutual funds came into existence after SEBI bifurcated debt funds into 16 categories. As their name suggests, the duration of these funds is longer than short-term funds but shorter than long-term debt funds. Historically these funds invest in slightly riskier securities, which exposes them to higher credit risk.. Investors must ensure that their financial goals match the maturity of the medium duration mutual fund of 3-4 years.
How Do Medium Duration Funds Work?
Medium-duration mutual funds are those funds that invest capital and assets in debt funds. After new regulations set forth by the Securities and Exchange Board of India (SEBI), debt funds were bifurcated into 16 categories. This is when medium-duration funds came into existence. These funds, as they are aptly referred to, fall into the category of funds of shorter durations relative to long-term debt funds and longer durations than short-term debt funds.
The way that these funds work is dependent on their medium durations, and historically, such funds tend to invest capital in securities that tend to be on the slightly risky side. The duration of medium-duration funds is typically between 3 to 4 years. Aligned with SEBI directives, a medium-duration fund, under the broad category of debt mutual funds, makes its primary investment in debt instruments and money market instruments.
Features of Medium Duration Funds
The following are the key features of medium duration mutual funds –
- The fund manager forms a portfolio with underlying securities including corporate bonds and government securities having a duration of 3 to 4 years. The investment duration is longer than short-term debt funds but shorter than long-term funds, ideally fitting into a 3 to 4 years investment horizon.
- These funds include securities with different credit ratings as per the investment strategy of the scheme.
- Medium debt funds are debt funds to generate low-risk returns.
- Although these are debt funds, the interest risk is slightly higher than other short-term debt funds because of longer market exposure. That being said, these are not as risk-free as liquid funds or ultra-short-term bond funds.
- Longer investment duration increases the investors’ risks due to interest rate changes. These funds perform better in a falling interest rate scenario.
Advantages of Investing in Medium Duration Mutual Funds
The following are some of the advantages of medium duration funds –
- With higher tax-efficient returns, MDFs are excellent alternatives to fixed deposits of 3-year duration. Investors who hold the investment for more than three years can successfully lower their tax rate by 20% after indexation.
- Although the interest rate risk is slightly higher than in short-term debt funds, MDFs are lower risk than long-term funds or equity funds and help investors meet medium-term investment goals. At the same time, medium duration funds are debt funds but earn higher returns than liquid and ultra-short-term funds because of the extended investment horizon.
- If you have an investment time frame of 3-4 years, a medium-term bond fund is suitable for you instead of long-term or short-term funds. Fund managers of MDFs invest in short and long-term securities of varied credit ratings to meet the investment strategy.
Risk Involved in Medium Duration Mutual Funds
The risks associated with medium duration funds are almost the same as other debt funds which are the following.
- Interest rate risk: Interest rate risk arises from interest rate fluctuations. It is a part of all debt fund investments. However, the severity depends on the duration of the investment. That being said, the longer duration will expose investors to higher interest rate risks. In the case of medium funds, interest rate risk is higher compared to short-term funds.
- Credit risk: The severity of credit risk, which is the risk of default on the issuer’s part, depends on the selection of the underlying securities. If the fund invests in low rated instruments for higher returns, it will increase the fund’s credit risk.
- Liquidity risk: It is important to invest in funds that are constantly performing to reduce liquidity risks. It will ensure that you will be able to redeem funds in a timely manner.
Factors To Consider Before Investing in Medium-Duration Mutual Funds
If you wish to invest in a medium-duration fund, you may want to take into account certain factors before you make a decision to invest:
- The first things to consider when you wish to invest in medium-duration funds is that of checking on the risk versus returns. You should note that a medium-duration fund is basically a debt fund. Consequently, similar to any other debt fund, a medium-duration fund carries with it three kinds of risk, namely credit risk, interest rate risk, and the risk of liquidity. This is why it is vital to make a thorough analysis of the portfolio of any medium-duration fund you are considering. Credit risk may be negligible if the fund invests in debt securities of a high standard. The past performance of the fund may also be taken into account before you invest.
- When you wish to invest in any kind of debt fund, you should remember that expense ratios play a key role. Since debt funds yield potentially low returns, expense ratios that are high may eat into any potential gains. Essentially, the expense ratio is the charge that the fund house charges for administrative and management services. It forms a small part of the total assets in the scheme and is expressed as a percentage.
- All investors are not alike, and each is unique in terms of their financial goals and future plans. Before you go ahead and invest in a medium-duration mutual fund, you should clearly outline your own objectives as these are meant for relatively medium-term gains. Consider your individual risk profile and horizon of investment and then take appropriate and corresponding investment decisions.
- These funds tend to be more tax-efficient relative to bank fixed deposits. Due to the 3-year term of investment, the funds give you indexation benefits.
Who Should Invest in Medium Duration Mutual Funds?
- Investors looking beyond traditional bank deposits for higher returns within a short period may find medium duration funds right for their portfolios.
- The medium duration funds invest in debt instruments with a duration of 3-4 years, making them best suited for conservative investors with a 4 years investment horizon. The average returns earned by some of the best funds in the category is 7-9% per year, which is slightly higher than bank FDs. The fund’s duration allows stable returns on the investment but these returns are not guaranteed. Therefore, investors who are looking for returns in that range can definitely consider these funds.
- Medium duration funds are higher in the risk spectrum than corporate bond funds or the Banking & PSU debt funds and invest in slightly lesser-rated securities. Therefore, investors who are willing to take moderate to moderately high risk for more returns should consider investing in these funds.
Taxability of Medium Duration Mutual Funds
Medium duration mutual funds are debt funds and are taxed accordingly. The effective tax rate depends on the duration of the investment tenure.
Dividends earned on medium duration funds are added to the investor’s taxable income and taxed at the rate as per the income tax slab. There is also a 10% TDS on dividend amount exceeding ₹5000 in a financial year.
Capital gains realised before 3 years since investment is considered short-term capital gain for tax purposes. In the prevailing tax system, a short-term capital gain is taxed as per the income tax slab rates.
For capital gains realised after 3 years of investment, long-term capital gain tax at the rate of 20% will apply along with the benefits of indexation. So, for investors in the higher tax bracket, the tax comes to be much lower and therefore the returns are higher than a 3-year FD.
How To Invest in Medium Duration Funds?
Investing in the medium duration Mutual Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1: Log in to your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Choose a medium duration fund that suits your needs and risk profile. You can learn more about each medium duration fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the medium duration fund(s) you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Medium Duration Mutual Funds
If you have been exploring the best MDFs, here are the top ones based on 5-year CAGR.
| Name of the Fund | Assets Under Management (in ₹crore) | Minimum investment amount (in ₹) | 3 yr CAGR (%) | 5 yr CAGR (%) |
| Aditya Birla Sun Life Medium Term Fund | 1,652 | 1000 | 14.75 | 8.61 |
| SBI Magnum Medium Duration Fund | 7,088 | 5000 | 7.37 | 7.91 |
| ICICI Prudential Medium Term Bond Fund | 6,306 | 5000 | 7.9 | 7.61 |
| Axis Strategic Bond Fund | 1,644 | 5000 | 7.55 | 7.37 |
| HDFC Medium Term Debt Fund | 3,539 | 5000 | 7.07 | 7.35 |
The above-mentioned top funds are for informational purposes only and are not recommendations. The funds are based on a 5-yr CAGR, which is subject to change frequently. Check out real-time data on Angel One.
Aditya Birla Sun Life Medium Term Fund
It is an excellent option in the medium to long duration fund category, with an average return of 9.53% since its implementation in 2013. The fund’s expense ratio of 0.86% is slightly higher than the other funds in the category. The fund’s top holdings are Shriram Finance Ltd, National Bank For Agriculture & Rural Development, Mahindra Rural Housing Finance Ltd., State Bank of India, Bharti Hexacom Ltd., etc.
SBI Magnum Medium Duration Fund
The fund has earned 9.08% annualised returns since its inception. The fund is known for generating consistent returns in-line with the other funds in the category and the NIFTY Medium Duration Debt Index C-III.
SBI Magnum Medium Duration Fund ranks highly for offering excellent downside protection. The fund provides an average return and liquidity from investing in debt and money market instruments.
ICICI Prudential Medium Term Bond Fund
In the last 10 year’s performance, the fund has earned an average return of 8.5% p.a. The fund’s top holdings include Tata Power Co. Ltd., DME Development Ltd., TVS Credit Services Ltd., JM Financial Credit Solutions Ltd., Bharat Sanchar Nigam Ltd., etc.
Axis Strategic Bond Fund
The fund has an expense ratio of 0.39%. It focuses on generating optimal returns for investors while maintaining liquidity. The fund has generated an average alpha of 2.45 over the years.
HDFC Medium Term Debt Fund
The fund follows the NIFTY Medium Duration Debt Index C-III. It has been in existence for 10-plus years, generating a return of 8.14% since inception. It has the ability to earn returns consistently in-line with most funds in the category.
Medium Duration Funds FAQs
Are medium duration mutual funds high-risk?
Should I invest in medium duration mutual funds?
You should consider investing in MDFs if you meet the following criteria -
- Earning low-risk, low-volatile returns from investing in debt securities and money market instruments.
- An investment horizon of 3-4 years.
- Earning higher returns than banks’ FDs of 7-9%
- Looking for dynamic investment options.
What are the expected returns of medium duration mutual funds?
What are the risks involved in investing in medium duration mutual funds?
Are medium duration mutual funds taxable?
Medium duration mutual funds are debt funds and, hence, taxed depending on the duration of the investment. That is, for an investment period of fewer than 36 months, the capital gain is taxed as per the investor's income tax slab rate.
If the mutual fund units are redeemed after 3 years, the LTCG rate is applied at 20% with the benefit of taxation.
How much money should I invest in medium duration mutual funds?
