Skip to content

Mutual Funds

Medium to Long Duration Funds

Written by - Akshatha Sajumon

January 12, 2022 6 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 a bond fund?

When an investor buys a bond, it means that he/she has lent money to the entity issuing the instrument. A bond fund mainly invests in fixed-interest securities like corporate bonds, government securities, commercial paper, money market instruments, and treasury bills. The main reason for investing in bond funds is to generate a steady interest income combined with capital appreciation. The bond issuers pre-decide the interest rate applicable as well as the maturity period. Hence, these are also called ‘fixed-income’ securities.

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 bond funds

Mentioned below are some of the significant advantages of investing in bond funds:

  1. Not affected by market movements

Bond mutual fund performance is not influenced significantly by market movements. Hence, these funds are often less volatile when compared to equity funds. A debt fund portfolio mostly comprises fixed-income securities.

  1. Portfolio stability

Since bond funds mainly invest in fixed-income securities, the returns are relatively stable. Therefore, these are ideal for risk-averse investors.

  1. Beneficial for first-time investors

First-time investors can invest in bond funds to begin their investment journey. This allows them the much-needed exposure to the concept of mutual funds and how they work.

  1. Ideal for parking surplus funds

Since bond funds are highly liquid, an investor can consider investing surplus cash in these funds and earn higher returns as compared to a regular savings bank account.

Things to consider while investing in long term bond funds

Some of the factors to consider before investing in long term bond funds are:

  1. Credit Risk – Long term bond fund investors may face the possibility that the issuer of the debt security does not meet the obligation of returning the principal at maturity and fails to make regular interest payouts.
  2. Interest Rate Risk – With movements in interest rates offered by the underlying securities, the fund’s interest rate risk could risk, especially for long term bond funds.
  3. Liquidity Risk – The mutual fund house may not have sufficient liquidity to revert to redemption requests, thus impacting an investor’s liquidity.

Taxation on long-term bond fund returns

Bond fund investments are termed as ‘long-term’ if the holding period is longer than three years. Thus, the resulting gains are referred to as ‘long-term capital gains. Long-term capital gains from a bond fund are taxable at 20%. This is irrespective of the income tax slab rate of the inventors. Long-term capital gains tax is calculated by taking into account the indexation, and this helps investors to reduce their overall tax liability.

Short term capital gains from debt mutual funds are taxed at the slab rate of the individual.

Lastly, any income received by an investor as dividend from a bond mutual fund is taxable in the hands of the investor from FY 2019-20 onwards. This is taxed at the slab rate of the individual. 

Long-term bond funds to Invest in 2021

Some of the top performing long-term bond fund recommendations for 2021 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.

Download one of India's best wealth management apps

Join more than one million investors and take control of your wealth

Download app