Most conservative debt investors don't even know the existence of medium duration funds. This is because most investors stick to liquid funds, ultra short term funds, short term funds, banking & PSU funds, corporate funds, etc. to take care of their short-term needs. Do you want to know more about medium duration funds? Read on.
Are you looking for a debt mutual fund where you can park money for four years? Are you ready to take some risk and volatility? If so, you can consider investing in medium duration funds. Be forewarned, these schemes are likely to be volatile because interest rates are likely to go up further in the coming months. The RBI is likely to raise rates again to contain inflationary pressure in the economy.
As per Sebi mandate, medium duration funds must invest debt in and money market instruments with Macaulay duration of three and four years. As you can see, these schemes are suitable for investors looking to invest for three to four years. However, you should check the portfolio duration of the scheme to ensure that the scheme is in line with your investment horizon.
Most mutual fund advisors do not recommend medium and long term debt schemes to regular investors. These schemes are extremely sensitive to changes in the interest rate environment. They suffer when the rates go up. Mutual fund advisors say many conservative investors would find it difficult to handle the volatility faced by these schemes.
As you know interest rates are likely to go up soon. So, you should invest in these schemes only if you have the nerve to face volatility. You should also have the patience to go through the entire tightening cycle which may last for two years.
There are no changes in the recommendation list this month. All the schemes have retained their place in the list. However, IDFC Bond Fund Medium Term Plan was in the fourth quartile for the last two months. The scheme had been in the third quartile two months before that. Please watch out for monthly updates so that you can keep track of your schemes.
Best medium duration schemes
Methodology:
ETMutualFunds has employed the following parameters for shortlisting the debt mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii)When H <0.5, the series is said to be mean reverting.
iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
Asset size: For debt funds, the threshold asset size is Rs 50 crore
(Disclaimer: past performance is no guarantee for future performance.)
Are you looking for a debt mutual fund where you can park money for four years? Are you ready to take some risk and volatility? If so, you can consider investing in medium duration funds. Be forewarned, these schemes are likely to be volatile because interest rates are likely to go up further in the coming months. The RBI is likely to raise rates again to contain inflationary pressure in the economy.
As per Sebi mandate, medium duration funds must invest debt in and money market instruments with Macaulay duration of three and four years. As you can see, these schemes are suitable for investors looking to invest for three to four years. However, you should check the portfolio duration of the scheme to ensure that the scheme is in line with your investment horizon.
Most mutual fund advisors do not recommend medium and long term debt schemes to regular investors. These schemes are extremely sensitive to changes in the interest rate environment. They suffer when the rates go up. Mutual fund advisors say many conservative investors would find it difficult to handle the volatility faced by these schemes.
As you know interest rates are likely to go up soon. So, you should invest in these schemes only if you have the nerve to face volatility. You should also have the patience to go through the entire tightening cycle which may last for two years.
There are no changes in the recommendation list this month. All the schemes have retained their place in the list. However, IDFC Bond Fund Medium Term Plan was in the fourth quartile for the last two months. The scheme had been in the third quartile two months before that. Please watch out for monthly updates so that you can keep track of your schemes.
Best medium duration schemes
- SBI Magnum Medium Duration Fund
- HDFC Medium Term Debt Fund
- IDFC Bond Fund Medium Term Plan
- Axis Strategic Bond Fund
Methodology:
ETMutualFunds has employed the following parameters for shortlisting the debt mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii)When H <0.5, the series is said to be mean reverting.
iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
Asset size: For debt funds, the threshold asset size is Rs 50 crore
(Disclaimer: past performance is no guarantee for future performance.)
( Originally published on Jan 05, 2022 )
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