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