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What Is Medium Duration Fund? Advantages of Medium Duration Fund Research Team | Posted On Monday, March 23,2020, 05:22 PM

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What Is Medium Duration Fund? Advantages of Medium Duration Fund



What Is Medium Duration Fund? Advantages of Medium Duration Fund

If you are a conservative investor and are looking to deploy your idle funds in some alternative investment other than bank fixed deposits, then debt funds are what you should invest in. Let’s try to analyse through this article, how medium duration debt fund can help you gain better returns in a falling interest rate regime:

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See Also: What Is Credit Risk Fund? Advantages of Credit Risk Fund

What Is Medium Duration Fund?

The medium duration funds are a collective investment scheme that invests in select bonds and money market instruments with the average maturity period ranging from 3-4 years. These funds lend money to select companies for a period of 3 or more years. You can earn decent returns by riding the interest rate fluctuations over the investment tenure.

Things to Know While Investing in Medium Duration Fund:

Before investing in medium duration funds in India, you must know the following important points:

Financial objectives: The first important point is to understand whether or not the fund objective matches your investment objectives. You may choose medium duration fund if you want to save for purposes like child’s education, purchase of a car or home down payment etc. Thus medium duration fund can help you create a corpus with investment tenure of 3 years and above.

Investment tenure: Planning your investment with the correct choice of funds will enable you to fulfil your financial goals in the future. You can opt for this investment if you are ready to keep your funds invested for more than 3 years.

Costs involved: Since debt mutual funds offer lower returns than equity mutual funds, it is wise to choose a fund that comes with a lower expense ratio. You must also be aware of the exit load charged for premature withdrawal of debt funds. Try and pick the right medium duration funds that come with lower charges.

Why Should You Invest in Medium Duration Fund?

  • You can choose to invest in these funds if you have already invested in fixed deposits and are looking for alternative investments for an investment horizon of 1-3 years.
  • You can choose these funds if they align with your investment goals. You can use the Medium duration fund to diversify your investment portfolio as well.
  • These funds are ideal for investors whose investment horizon are a little over 3 years and prefer to earn returns while keeping the risk low.
  • These funds help investors to earn better returns than bank fixed deposits. Thus if you are a beginner and want to enter the mutual funds market, then these funds are good options to start with. However, make sure they align with your investment objectives.

Medium Duration Fund Returns:

The medium duration fund is basically a debt fund. Thus they carry the risks associate with debt fund investment like credit risk, interest rate risk and liquidity risk. In order to keep the risks at a minimum level, you must ensure that your fund invests in highly rated debt securities. Perform thorough research about the fund manager and his performance in the past. You can do this by analysing the fund manager performance under several interest rate regimes. An efficient fund manager will be able to manage your funds under changing interest rate regimes and should yield you returns with the range of 7-9%.

Advantages of Medium Duration Fund:

  • The medium duration funds are suitable investment options when the interest rate in the economy is expected to remain stable or when the interest rates go down.
  • These investments can be a worthy alternative of the medium or long term fixed deposits. Investors can invest in these funds when the fixed deposit interest rates are low or if they are looking for alternative investments of at least 3 years time horizon.
  • The medium duration funds are more tax-efficient when compared to fixed-deposits when invested for tenure 3 years or more. These investments also qualify for indexation benefit.

Risks of Investing in Medium Duration Fund:

While investing in medium duration debt funds you must evaluate the investment risks associated with the fund. Medium duration debt funds are not fully risk-free investment, unlike fixed deposits. Some internal risks are associated with such types of investments, for example, credit risk and interest rate risk.

As an investor, you may face credit risk if your portfolio contains assets allocated to low-rated securities. You may face interest rate risk if a change in the interest rate regime negatively impacts the price of the securities.

Thus you must do thorough research before investing in such funds. Evaluate the amount of risk involved and the credit ratings of the funds to understand whether or not the funds align with your investment goals.

Top 5 Medium Duration Fund 2020:

Here is a list of top 5 medium duration funds in India:

  • SBI Magnum Medium Duration Funds
  • UTI Medium Term Funds
  • ICICI Prudential Medium Term Bond Funds
  • L&T Resurgent India Bond Fund
  • Axis Strategic Bond Fund

See Also: What is Overnight Fund? Advantages of Overnight Fund

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