Before allocating money to a new mutual fund scheme, investors want to ensure their portfolio is well-diversified. This can be done by allocating funds in a healthy ratio to equity, debt hybrid schemes and gold.
Among debt mutual funds, there are a number of sub-categories which include long duration, short duration, money market, liquid and medium duration, among others.
Here we give the lowdown on long duration mutual funds:
In the first three months of this calendar year, a number of fund houses such as HDFC, UTI and Axis launched their schemes in this category.
These schemes have not posted exceptionally high returns. The MorningStar data shows that the past 1-year returns of long duration funds were 6.11 percent, as on Apr 26, 2023.
However, investment in these schemes is considered safe. Simply because most long duration funds invest in government securities or bonds that have high credit ratings. But before proceeding further, let us understand what exactly are long duration funds.
What are long duration funds?
Long duration funds are mutual funds that make investment in debt and money market instruments with Macaulay duration of the portfolio greater than seven years, according to the SEBI (Securities Exchange Board of India) categorisation.
It is vital to note that there are only seven mutual fund schemes in the category of long duration funds with total assets amounting to ₹8,797.88 crore, shows the AMFI (Association of Mutual Funds in India) data.
Out of this, a major chunk i.e., ₹4,674.99 crore were added in the month of March itself.
In contrast, the total assets under management (AUMs) of short duration funds amount to ₹91,238 crore whereas AUMs of medium duration funds amount to ₹27,090 crore.
Liquid funds, on the contrary, are among the most popular debt schemes with 36 schemes and AUMs of ₹3,32,498 crore.
|AUMs ( ₹crore)
(Source: AMFI; data as on March 31, 2023)
It is vital to note that the overall debt-oriented schemes are garnering less interest among investors.
While the share of equity-oriented assets rose from 48.9 percent to 51.6 percent, the proportionate share of debt schemes declined to 19.6 percent, shows the latest AMFI data as on Mar 31, 2023.
Sensitivity to interest rates
Long duration funds are very sensitive to interest rate cycle. When interest rates rise in the market on account of repo rate hike, these funds post higher yields. On the contrary when interest rates decline during RBI’s policy easing — the investors who invest over a period of time stand to gain in terms of capital gains.
“Since these funds are highly sensitive to interest rate movements, they offer a scope of higher capital gains during policy easing cycle,” says Delhi-based chartered accountant and financial advisor Deepak Aggarwal.
He, however, cautions that these instruments are primarily meant for the investors who have a long investment horizon.
Also, since these funds are volatile in nature, investors who have a risk appetite to tolerate extreme volatility should invest in them.