Medium duration funds invest in debt and money market securities such that the Macaulay Duration of the scheme portfolio is 3 – 4 years. Longer the duration of a fixed income security higher is its interest rate sensitivity. Interest rates have an inverse relationship with prices. Since the duration of the medium duration funds is more than short duration funds, medium duration funds are more sensitive to interest rate changes in the short term compared to short duration funds. In a rising interest rate regime, medium duration funds are likely to underperform short duration funds. However, the yields to maturity of these funds are usually higher than short duration funds. Therefore, over a sufficiently long investment tenor, which includes different interest rate cycles i.e. both rising interest rate and falling interest rate regimes, these funds can outperform short duration. These funds are suitable for investors with moderate risk appetites, but they may not be suitable for investors with low risk appetites. Investors need to have an investment horizon of at least 3 years for these types of debt funds.
