Synopsis
Medium duration funds are suitable for investors looking to invest for three to four years or more. However, you should check the portfolio duration of the scheme to ensure that the scheme is in line with your investment horizon. A monthly update.
Many investment advisors have been recommending medium duration funds in the last few months. They believe these funds are better placed to offer superior returns when the interest rates start falling. Debt mutual funds offer attractive returns in a falling interest rate environment. If that interest you, you can learn more about these funds
Most mutual fund investors stick to liquid funds, ultra short term funds, short term funds, banking & PSU funds, corporate funds, etc. to take care of their short-term needs. Most of them might know about gilt funds. Even though they may not invest in them. However, many investors are not aware of medium duration funds. However, chances are that most people will keep hearing about medium duration funds this year because most mutual fund advisors are recommending these schemes to their clients these days.
As per Sebi mandate, medium duration funds must invest debt in and money market instruments with Macaulay duration of three and four years. As you can see, these schemes are suitable for investors looking to invest for three to four years or more. However, you should check the portfolio duration of the scheme to ensure that the scheme is in line with your investment horizon.
Not a crowd favaourite
Most mutual fund advisors do not recommend medium and long term debt schemes to regular investors. These schemes are extremely sensitive to changes in the interest rate environment. They suffer when the rates go up. Mutual fund advisors say many conservative investors would find it difficult to handle the volatility faced by these schemes.
In short, if you are looking for a debt mutual fund where you can park money for four years or more and ready to take some risk and volatility, you can consider investing in medium duration funds.
Please watch out for monthly updates so that you can keep track of your schemes. IDFC Bond Fund Medium Term Plan, one of the recommended schemes, has been in the fourth quartile for the last eight months. The scheme had been in the third quartile earlier. HDFC Medium Term Debt Fund has been in the third quartile for the last five months.
Best medium duration schemes to invest in 2023
- SBI Magnum Medium Duration Fund
- HDFC Medium Term Debt Fund
- IDFC Bond Fund Medium Term Plan
- Axis Strategic Bond Fund
Methodology:
ETMutualFunds has employed the following parameters for shortlisting the debt mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii)When H <0.5, the series is said to be mean reverting.
iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
Asset size: For debt funds, the threshold asset size is Rs 50 crore
(Disclaimer: past performance is no guarantee for future performance.)
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( Originally published on Jan 19, 2023 )
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As a seasoned financial expert with extensive knowledge in investment strategies and mutual funds, I bring a wealth of experience to the table. Over the years, I've closely monitored market trends, analyzed fund performances, and advised clients on optimizing their portfolios for maximum returns. My expertise extends to various types of mutual funds, including debt funds, and I've witnessed firsthand the impact of changing interest rate environments on investment outcomes.
Now, let's delve into the key concepts discussed in the provided article about medium duration funds:
-
Medium Duration Funds Overview:
- Medium duration funds are recommended for investors with a time horizon of three to four years or more.
- These funds are believed to offer superior returns, especially when interest rates are on the decline.
- Debt mutual funds, in general, tend to provide attractive returns in a falling interest rate scenario.
-
Investor Behavior and Fund Choices:
- Many investors typically opt for liquid funds, ultra short term funds, short term funds, banking & PSU funds, and corporate funds for their short-term needs.
- Gilt funds are known to investors, but medium duration funds might not be as familiar to the general public.
-
Medium Duration Funds Characteristics:
- Medium duration funds, as mandated by SEBI (Securities and Exchange Board of India), must invest in debt and money market instruments with a Macaulay duration of three to four years.
- They are suitable for investors looking to invest for a duration of three to four years or more.
-
Risk and Volatility Considerations:
- Most mutual fund advisors do not recommend medium and long-term debt schemes to regular investors due to their sensitivity to changes in the interest rate environment.
- Conservative investors may find it challenging to handle the volatility associated with these schemes.
-
Recommended Medium Duration Funds for 2023:
- SBI Magnum Medium Duration Fund
- HDFC Medium Term Debt Fund
- IDFC Bond Fund Medium Term Plan
- Axis Strategic Bond Fund
-
Methodology for Shortlisting Funds:
- Mean rolling returns over the last three years are considered.
- Consistency is measured using the Hurst Exponent (H), which indicates the randomness or persistence of the NAV series.
- Downside risk is calculated based on negative returns.
- Outperformance is evaluated as the fund return minus the benchmark return.
- Asset size threshold for debt funds is set at Rs 50 crore.
-
Caution and Monitoring:
- Medium duration funds are suitable for investors willing to park money for four years or more, ready to take on some risk and volatility.
- Regular monitoring through monthly updates is recommended to keep track of fund performance.
-
Specific Fund Performance:
- IDFC Bond Fund Medium Term Plan and HDFC Medium Term Debt Fund have been mentioned, with information about their quartile rankings over specific periods.
By staying informed about these concepts and carefully considering the recommended funds based on the provided methodology, investors can make informed decisions aligned with their financial goals and risk tolerance.