Invest in the best mutual funds recommended by Scripbox that are algorithmically selected that best suit your needs
Till Date CAGR
|Axis Strategic Bond Fund (G)|
|HDFC Medium Term Debt Fund (G)|
|ICICI Prudential Medium Term Bond Fund (G)|
|SBI Magnum Medium Duration Fund (G)|
|HSBC Medium Duration Fund (G)|
|Kotak Medium Term fund (G)|
|Bandhan Bond Fund Medium Term Plan (G)|
|Nippon India Strategic Debt Fund (G)|
|DSP Bond Fund (G)|
|UTI Medium Duration Fund (G)|
|Sundaram Medium Term Bond fund (G)|
|Baroda BNP Paribas Medium Duration Fund (G)|
|Aditya Birla Sun Life Medium Term Plan (G)|
|Union Medium Duration Fund (G)|
|Invesco India Medium Duration Fund (G)|
Medium duration funds are open ended debt mutual funds that are mandated to invest in securities with maturity around 3-4 years. These funds are subject to interest rate risk. The fund manager of these funds is free to invest across securities with different credit qualities. Hence, they have significant default risk as well.
Recommended: To check best mutual funds to invest
|Fund Name||Till Date CAGR||Expense Ratio|
|SBI Magnum Medium Duration Fund (G)||7.8%||1.22%|
|ICICI Prudential Medium Term Bond Fund (G)||7.4%||1.41%|
|HDFC Medium Term Debt Fund (G)||7.7%||1.31%|
|Kotak Medium Term fund (G)||7.4%||1.59%|
|Axis Strategic Bond Fund (G)||8%||1.09%|
Medium Term funds are open-ended debt mutual funds that invest in securities such that the portfolio’s Macaulay duration is around 3-4 years. In other words, it means that medium duration funds have securities with maturities of 3-4 years.
The returns from these funds are more or less predictable. However, the returns aren’t guaranteed. They are subject to credit risk, interest rate risk and liquidity risk.
These funds have a longer duration than short term funds and hence are subject to interest rate risk. During the rising interest rate cycle, bond prices fall. Since these have a longer maturity than short duration funds, they are the most affected. Also, fund managers might invest in low rated securities with a hope that their credit rating might improve in the long run. Hence these funds are exposed to default risk as well.
Medium duration debt funds best suit investors with low to medium risk tolerance and an investment horizon of 3-4 years. Investors who want to invest in medium to long term fixed deposits can also look at investing in these. However, one has to consider the risks involved in investing in them.Medium duration funds are taxed similar to debt funds. The short term capital gains (below three years) are taxable at the individual’s income tax slab rate. The long term capital gains are taxable at 20% with indexation benefit. Investors falling under the highest income tax can benefit from these by staying invested in these for a minimum of 3 years.
However, the LTCG benefit is no longer available from April 1st 2023 (as per the Finance Bill 2023). Capital gains from debt mutual funds from April 1st 2023, will be taxed as per the investor’s income tax slab rate.
Medium duration funds invest across money market and debt instruments. The Macaulay duration of these funds varies between three to four years.
Medium term debt funds are a type of debt mutual funds. Hence the taxation of these funds is similar to that of debt mutual funds. The gains from medium term debt funds are taxable on the basis of the investment holding period. For redemptions within three years of investment, the gains attract Short Term Capital Gains Tax (STCG). The gains are taxable at an individual’s income tax slab rate.
On the other hand, for redemptions after three years since the date of investment, the gains attract Long Term Capital Gains Tax (LTCG). The gains are taxable at 20% with indexation benefit or at 10% without any indexation benefit.
Moreover, an investor in the highest tax bracket can benefit from these investments by investing in them for a minimum of three years.
Furthermore, the LTCG benefit is no longer available to debt mutual funds as per the Finance Bill 2023. Capital gains from debt mutual funds from April 1st 2023, will be taxable as per the investor’s income tax slab rate.
A medium term plan is suitable for investors with low to medium understanding of risk. Also, investors with a medium duration horizon of 3-4 years can consider these funds as an option. The returns from these funds are not affected by equity market movements and are some what predictable. However, the returns are not guaranteed.
Moreover, these funds come with a risk attached to them. The medium term bond fund has high interest rate risk and default risk. Since these funds have a duration of 3-4 years, they are subject to interest rate risk. Also, the portfolio manager of the fund is free to invest in securities with different credit ratings. Hence, there can be a default risk in these funds.
The fund manager invests in certain securities with low ratings with an expectation that the rating would upgrade. This exposes the fund to default risk. Additionally, during redemption pressure, sometimes it becomes difficult for the fund manager to exit their positions. This exposes the investments to liquidity risk.
Medium term bond funds invest in securities with maturities of 3-4 years. This is a small category (less than 2% of the total debt fund assets). They are open ended debt mutual funds suitable for an investment horizon of 3-4 years. This exposes them to interest rate risk. Also, the credit quality of funds in this category was relatively poor.
Scripbox doesn’t recommend funds in this category because of the higher default risk and higher interest rate risk.