Long Duration Funds are mutual funds which invest in long-term debt securities and money market instruments in which the average tenure is more than 7 years.
What are Long Duration Funds – Definition & Description
As per SEBI classification, Long Duration Funds are open-ended debt funds that invest in instruments that have *Macaulay duration greater than 7 years. These funds are a good investment option for investors who want to take less risks, earn moderate returns and are tax efficient. The investment is done in various debentures with different credit ratings so as to derive interest income mainly from corporate bonds and capital appreciation which is dependent on macroeconomic factors like interest rate, liquidity and inflation. The returns earned are moderate.
*Macaulay Duration – The Macaulay duration, in simple terms is the weighted average term period over which the cash flows (principal repayment as well as periodic interests) from the bond is received. It is measured in years.
Advantages of Long Duration Funds
- It is ideal for low risk-appetite people who do not prefer investing in equities due to market fluctuations and are ready to invest for long tenure
- Long-term debt mutual funds have a proven track record of generating higher mutual fund returns than Fixed Deposits (FDs)
- Long-term debt funds usually have better tax treatment over FDs and other investment options. Longer the tenure, better is the indexation advantage
- Open-ended long duration funds provide the flexibility of investing in small amounts and changing the amount as desired through SIPs and thus provide benefit of rupee-cost averaging
- Fund Manager invests in various papers of debt securities and brings a diversified portfolio
Low-cost structure and high liquidity can also be accounted as another benefit to the investor
Risks and Returns
It is expected to give higher returns than Fixed Deposits and also has less tax liability. However, bond value may fall down if interest rates are high and vice-versa. Bond price and bond yield share an inversely proportional relation with each other and are also dependent on rates of interest. When interest rates rise, FDs or other such investment options might seem more beneficial to the investors. In the rising interest rate scenario, one would opt for the other investment instruments. Thus, when interest rates go higher, bond prices fall and bond yields rise. Those who have invested may earlier may see negative returns with the fall in bond prices. Lower interest rate means lower yields and higher bond prices but also higher volatility of the mutual fund. Lower credit rating of the fund can increase the returns but risk volatility.
Debt funds, therefore carry the risk of interest rate and are also impacted by inflation and liquidity change.
Types of Long Duration Fund
Long Duration are debt funds which can be government bonds, corporate bonds, government securities, secularized debt, etc. It can be segmented majorly into the following types:
- Income Funds
- Gilt Funds
- Dynamic Bond Funds
Income Funds – Income Funds invest in government as well as corporate bonds, certificates of deposit and other debt instruments of high credit to increase liquidity and decrease volatility so as to generate regular income to the investors.
Gilt Funds – Gilt Funds invest the corpus only in state and central government securities of longer maturities and their credit rating is high as its issued by the government. It also has low credit risks and makes it one of the safest investment options.
Dynamic Bond Funds – Dynamic Bond Funds, as the name suggests have dynamic composition of portfolio as they take interest rate calls and make changes in investments and also have varying maturity tenures. It usually has fluctuating average maturity duration as they change their portfolio composition with the changing interest regime and invest in small and long term maturity plans.
Income Funds are ideal for those who have high risk bearing capacity and long term investment horizon. These are vulnerable to market shifts but diversify their portfolio and try to give returns even when markets are unstable. Gilt Funds are also volatile when there is a change of interest rate, however as all G-sec (government securities) are involved, there is a very less chance that the government will default on public’s money i.e. the loans/investment from the investors. Dynamic Bonds generally have large assets under management (AuM) owing to their dynamic composition.
How to invest in Long Duration Funds?
To invest in Long Duration funds, investors should follow the given steps:
- Log in to your account or Sign-up to Paisabazaar.com
- Enter the details like – Full Name, Mobile Number, KYC details etc.
- Click on View Funds for different mutual funds
- Analyse the different Long Duration Funds like Gilt Funds or Dynamic Bonds by several AMCs (Asset Management Companies) available for investment
- Choose the best fund according to the investment amount, investment period and more