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Medium to Long Duration Funds – What is It?, Features, Advantages & Taxation

Written by - Akshatha Sajumon

May 9, 2023 7 minutes

Long duration funds or long-term bond funds are debt mutual funds that primarily invest in long-term fixed-income securities or instruments. As per SEBI guidelines, long-term bond funds must invest in debt and money market instruments that have a Macaulay duration of over seven years. This makes them best suited for long-term investments.

Here, we will explore the concept of long-term bond funds and share some of the fund recommendations in this category.

What is Medium to Long Duration Funds?

Medium to long duration funds are a type of mutual fund that invests in bonds or fixed-income securities with maturity periods ranging from several years to over a decade. These funds aim to provide regular income through interest payments and may carry moderate risk.

Medium to long duration funds are suitable for investors who have a longer investment horizon and are willing to tolerate potential fluctuations in bond prices. These funds offer the potential for higher returns compared to short-term funds but come with a slightly higher level of risk.

What are the features of bond funds?

Some of the noteworthy features of bond funds are:

  • Interest rates & price – Interest rates & prices of debt instruments have an inverse relationship, which means they move in opposite directions. For instance, a falling interest rate means that the bond prices go up and this provides a boost to NAVs of the bond funds. Since a reduction in the interest rates causes a price rise of long-term securities, investors must invest in long-term debt funds when the interest rates are expected to fall. 
  • Investors who prefer long-term investments (i.e., 3 years & above), and can bear some level of risk, should preferably invest in long-term bond schemes. 
  • These funds are ideal for investors who prefer fluctuating interest rates. 

Advantages of Medium to Long-Duration Funds

Here are some advantages of investing in medium to long-duration funds:

  • Potential for higher returns: Medium to long-duration funds have the potential to generate higher returns compared to short-term funds or bank deposits, especially during periods of rising interest rates.
  • Diversification: Investing in medium to long-duration funds allows for diversification as these funds typically hold a portfolio of bonds from different issuers, sectors, and maturities. This diversification helps spread the risk.
  • Regular income: These funds provide regular income in the form of interest payments from the bonds held in the portfolio. This can be beneficial for investors seeking a steady income stream.
  • Suitable for long-term goals: Medium to long-duration funds are well-suited for investors with longer investment horizons, such as retirement planning or saving for major financial goals.
  • Potential for capital appreciation: Apart from generating regular income, these funds also offer the potential for capital appreciation if bond prices increase over time.
  • Flexibility: Medium to long-duration funds generally offer liquidity, allowing investors to buy or sell their units on any business day, providing flexibility to manage their investments.
  • Professional management: These funds are managed by professional fund managers who actively monitor the bond market and make investment decisions based on their expertise, potentially optimizing returns for investors.

Things to consider while investing in Medium to Long Duration Funds

Here are some of the factors to consider while investing in Medium to Long Duration Funds:

  • Investment Horizon: Consider your investment time frame and ensure it aligns with the medium to long-term nature of these funds. These funds are more suitable for investors with a longer time horizon, typically five years or more.
  • Risk Tolerance: Understand and assess your risk tolerance. Medium to long-duration funds may carry a moderate level of risk due to fluctuations in bond prices. Evaluate whether you are comfortable with potential fluctuations in the value of your investment.
  • Interest Rate Outlook: Consider the prevailing interest rate environment and the outlook for future interest rates. When interest rates rise, bond prices tend to fall, which can impact the value of the fund. Assess whether the current interest rate environment is favorable for investing in medium to long-duration funds.
  • Fund Performance: Evaluate the historical performance of the fund. Look for consistency in generating returns over the long term. However, past performance is not a guarantee of future results, so it’s important to consider other factors as well.
  • Fund Management: Research the fund manager’s experience, expertise, and track record. A skilled and experienced fund manager can play a crucial role in navigating the bond market and optimizing returns for investors.
  • Expense Ratio: Consider the expense ratio, which represents the annual fees charged by the fund for managing your investment. Compare the expense ratios of different funds to ensure you are getting value for your money.
  • Fund Composition: Understand the portfolio composition of the fund. Evaluate the types of bonds it holds, their credit ratings, and the diversification within the portfolio. A well-diversified portfolio can help mitigate risks.
  • Fund Objectives: Review the investment objectives and strategy of the fund. Ensure they align with your investment goals, whether it’s generating income, capital appreciation, or a combination of both.
  • Tax Implications: Consider the tax implications of investing in medium to long-duration funds. Understand how interest income and capital gains from the fund will be taxed and how it fits into your overall tax planning.

Taxation on Medium to Long Duration Funds

Medium to long duration funds are taxed in a similar way as debt funds. The short-term capital gains (after a holding period below 36 months) are taxed depending on your income tax slab. The long-term capital gains (after a holding period of 36 months or more) are taxed at 20% with the indexation benefit.

Long-term bond funds to Invest in 2023

Some of the top performing long-term bond fund recommendations for 2023 are:

  1. Aditya Birla SL Income Fund

About the Fund

The scheme aims to generate consistent returns through superior yields from investment that have moderate levels of risk. It adopts a diversified investment approach by investing 70.7% in debt. Of this, 51.93% is invested in government securities and 18.81% in very low-risk securities. It is suitable for investors who want to park their funds for longer duration while adopting less risk compared to equity funds.

Inception DateJan 1, 2013
Benchmark NameCRISIL Composite Bond Total Return Index
Fund ManagerBhupesh Bameta
Expense Ratio0.40%

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception
  1. Kotak Bond Fund

About the Fund

The scheme’s objective is to provide reasonable returns combined with high levels of liquidity through investments in debt instruments like bonds, debentures, and government securities. It also invests in money market instruments like treasury bills, commercial papers and certificates of deposit. The fund tries to spread the risk across different issuer categories available in the debt markets.

Inception DateJan 1, 2013
Benchmark NameNIFTY Short Duration Total Return Index
Fund ManagerDeepak Agrawal
Expense Ratio0.34%

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-YearSince Inception


Regular debt mutual fund investors should be cautious while investing in long-term bond funds, since these may be extremely sensitive to interest rate movements. If funds are chosen in haste, investors can incur significant losses in case the interest rates rise or remain the same. Similarly, they can profit when the interest rates start falling.


  1. Can you sell long-term bond funds at any time?

Yes, you can sell long-term bond funds at any time as per your requirement. However, selling them at any time without estimating the potential gain/loss could have a significant financial impact.

  1. Can bond funds lose money?

Yes, bond funds can lose money depending on the interest rate movements. The extent of gains or losses also depends on the portfolio composition.

  1. How to invest in long-term bond funds?

An investor can download the Fisdom app on his/her smartphone to begin investing in long-term bond funds. The app allows investors to explore a wide range of mutual fund options that can be selected based on individual risk and return expectations.

  1. What are the different types of debt funds?

Some of the commonly available debt mutual funds include overnight funds, liquid funds, gilt funds, banking & PSU funds, long-term bond funds, corporate bond funds, etc.

  1. What is the duration of short-term bond funds?

Some of the short-term bond funds include overnight and liquid funds, which have maturities ranging from one-day to 91 months. Ultra short-term funds come with maturities of 3-6 months.

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