Medium to Long duration funds invest in debt and money market securities such that the Macaulay Duration of the scheme portfolio is more than 7 years. The duration of a fund is a measure of its interest rate sensitivity and as such, long duration funds are highly sensitive to interest rate changes. In a rising interest rate regime, long duration funds are likely to underperform other debt fund categories. However, in a falling interest rate regime, long duration funds can generate excellent returns, even in double digits sometimes. Since long duration funds can be quite volatile in a rising interest rate environment, one should try to invest in these funds when bond yields / interest rates are peaking. In unfavorable conditions these funds can underperform for long times, but when interest rate regime turns favorable, investors can benefit both from higher yields and capital appreciation. These funds are not suitable for investors with low risk appetites. However, if you have appetite for short term volatility and have a long investment horizon, you can invest in long duration funds to get good returns in the long term.
