In the current interest rate environment, medium-duration mutual funds have emerged as strategic investment options for investors looking beyond traditional short-term debt instruments. These specialised debt funds, which invest in securities with a Macaulay duration of three to four years, offer a balanced approach to fixed-income investing by providing potentially higher returns than liquid funds while maintaining moderate risk levels.
Understanding Medium Duration Funds
- Medium duration funds must invest in debt and money market instruments with a Macaulay duration of 3-4 years
- Position: Occupy the middle ground between short-term and long-term debt funds
- Timing advantage: Particularly well-positioned to offer superior returns when interest rates start falling
- Regulatory framework: Categorised and regulated by SEBI with specific duration mandates
Top Medium Duration Funds
1. SBI Magnum Medium Duration Fund (Direct Growth)
- 3-year returns: 8.53%
- 5-year returns: 7.40%
- Fund size: ₹6,604 crore
- Risk level: Moderately high
- Minimum investment: ₹5,000 (lump sum), ₹500 (SIP)
- Key strength: Strong fundamentals with disciplined credit quality management
2. HDFC Medium Term Debt Fund (Direct Growth)
- 3-year returns: 8.46%
- 5-year returns: 7.79%
- Fund size: ₹3,841 crore
- Risk level: Moderately high
- Minimum investment: ₹100 (both lump sum and SIP)
- Note: Has been in the third quartile for the last 19 months
3. Axis Strategic Bond Fund (Direct Growth)
- 3-year returns: 8.89%
- 5-year returns: 8.05%
- Fund size: ₹1,930 crore
- Risk level: Moderately high
- Minimum investment: ₹100 (both lump sum and SIP)
- Key strength: Flexible mandate allows managers to adjust between corporate bonds and government securities
Also read: SBI Aurum vs. HDFC Infinia: Which Luxury Card Is Really Worth It?
4. Bandhan Bond Fund – Medium Term Plan (Direct Growth)
- 3-year returns: 8.01%
- 5-year returns: 6.22%
- Fund size: ₹1,478 crore
- Risk level: Moderate
- Minimum investment: ₹1,000 (lump sum), ₹100 (SIP)
- Note: Has been in the fourth quartile for the last 22 months
5. Aditya Birla Sun Life Medium Term Plan (Direct Growth)
- 3-year returns: 15.66%
- 5-year returns: 14.33%
- Fund size: ₹2,337 crore
- Risk level: Moderately high
- Minimum investment: ₹1,000 (both lump sum and SIP)
- Key strength: Significantly outperforming category averages
Who Should Consider Medium Duration Funds?
- Have an investment horizon of 3-4 years or longer
- Seek returns are higher than traditional bank deposits
- Want lower volatility than equity investments
- Have moderate risk tolerance
- Aim to diversify their fixed-income portfolio
- Can withstand some interim volatility
Key Risk Considerations
- Interest rate sensitivity: When rates rise sharply, these funds may experience temporary valuation declines
- Credit risk: The Quality of underlying securities directly impacts fund performance and safety
- Not for short-term goals: Unsuitable for emergency funds due to potential volatility
- Early redemption costs: May incur exit loads if withdrawn before the recommended tenure
- Lower returns than equity: Performance will typically lag behind equity funds in bull markets
Selection Methodology
- Mean rolling returns over three years
- Consistency measures using the Hurst Exponent
- Downside risk assessment
- Outperformance versus benchmarks
- Minimum asset size threshold of ₹50 crore
Factors to Consider Before Investing
- Financial objectives: Align with your investment goals and risk tolerance
- Credit ratings: Examine the portfolio’s exposure to various credit quality securities
- Duration matching: Ensure your investment horizon matches the fund’s duration profile
- Expense ratio: Compare cost structures across similar funds
- Fund manager expertise: Research the track record of the fund management team
Final Recommendations
For investors with a genuine 3 to 4 year investment horizon and moderate risk tolerance, medium duration funds warrant serious consideration. Before investing:
- Carefully assess your time horizon and risk tolerance
- Check each fund’s portfolio duration to ensure alignment with your investment goals
- Monitor monthly updates to track performance consistency
- Consider starting with funds that have low minimum investment requirements if you’re testing the category
- View medium duration funds as part of a balanced investment strategy rather than a standalone solution
- Remember that while these funds offer compelling potential, they do require the ability to withstand some volatility for optimal results. As with all investments, past performance never guarantees future returns.
Written by Promita Ghosal
