Medium to Long duration funds invest in debt and money market securities such that the Macaulay Duration of the scheme portfolio is 4 – 7 years. Since the durations of these funds are fairly long, these funds are more sensitive to interest rate changes compared to medium duration funds. In a rising interest rate regime, medium to long duration funds are likely to underperform medium and short duration funds. However, in a falling interest rate regime, medium to long duration funds can generate excellent returns for investors. Since the normal shape of the yield curve is upward sloping, the yields to maturity of these funds are usually higher than medium and short duration funds. From a timing perspective, these funds can be good investment options for when bond yields / interest rates are peaking. Investors can benefit both from higher yields and capital appreciation, when interest rate regime turns favorable. 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 long investment horizon for these types of debt funds.
