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All about Duration Mutual Funds?

Janhavi Shinde Janhavi Shinde 21 February 2019

Sticking to either short-term or long-term mutual funds itself is a task since the concept of duration isn’t clear amongst many. Here, we help you turn the financial wave in your favour.

All About Duration Mutual Funds

Welcome, you neighbouring broke millennial!

I am sure, the lightness in your wallets and perhaps bank accounts have made you google this write-up. Nevertheless, it is never too late to stop giving excuses and start making changes!

It is always wise to start early savings and investments, isn’t it?

To begin with, mutual funds are one of the best investment plans if you wish for wealth creation over a period of time. Trust us, they can really help you make wealthy!

It doesn’t really matter if you are actually looking for capital gains or for regular flow of income, mutual funds of varied types can help you achieve your financial goals.

Mutual funds such as ETFs, debt funds, index funds, tax-saving mutual funds, etc. are some of the options that you can invest in, according to your requirements keeping in mind your financial goals. Simply put, there are mutual funds that are duration based that help to achieve your short-term, mid-term and long-term goals. Is it time to invest in duration mutual funds?

Let’s find out more about these duration mutual funds.

What are duration mutual funds?

A ‘duration’ actions any bond’s sensitivity for a change in interest rates. In short, it measures the no. of years it would actually take for the cost of a bond to settle its internal cash flows. The duration would be greater if the bond is longer until its maturity. In short, a bond would be more responsive to changes in interest rates depending on how longer it is.

If you wish that the interest rate should fall while the bond is held, ideally a bond that has a longer duration should be chosen. This is because the bond’s price would hike more than any comparable bond that is with shorter durations.

On the other hand, if you fall among those type of investors, who are actually anxious about greater instabilities in the principal value of bond holdings, then you should opt for short duration bonds. However, if you feel you are comfortable enough with market fluctuations and are pretty sure about the interest rates to drop, you should consider for bonds with a longer duration.

Mutual funds too work in the same way. These too are segregated into short-duration, mid-duration and long-duration mutual funds. In short, this duration is nothing but the time or term you wish to be invested in.

Short-term mutual funds and Long-term mutual funds

Mutual fund jargons or terminology can be really confusing. This can be even more prominent if you have been saving in a traditional way till now.

Short duration mutual funds are the ones that can be liquidated within a duration of 3 years. On the other hand, long duration mutual funds are the ones that can be held for a longer duration of 5 years or more.

Experts suggest, that it is wise to stay invested for a longer time when it comes to mutual fund. Simply because, staying invested for a longer time can be fruitful for the advantage of the power of compounding. That said, with the variety of mutual funds that are available in the market, you as an investor, can seek an opportunity to benefit out of the short term investments plans too.

Best short-duration mutual funds

Ultra-short term debt funds and liquid funds are the best buy if you wish to invest in short-term duration mutual funds that may last for a week to over a year. The returns that these funds offer are any time more than what a savings bank account can offer. Besides, the returns that an ultra-short fund would fetch would be even better than that of a bank’s fixed deposit. But these mutual funds are always subject to market-risk and therefore, the scope of guarantee is too less.

Some of the best short-duration mutual funds are UTI Short Term Income Fund, HDFC Short Term Debt Fund, L&T Short Term Bond Fund, etc.

Best mid-duration mutual funds

In case you have certain mid-term goals such as buying a car or buying a second home or say your child’s education, investing in mutual funds for a mid-duration of say 1 year to 3 years would be the best option.

Some of the best mid-duration mutual funds are HDFC Top 100 Fund – Direct plan – Growth option, Axis Bluechip Fund Direct Plan Growth, Reliance Large Cap Fund – Direct plan – Growth option, etc.

Best long-duration mutual funds

In case you are willing to stay invested for more than 5 years or plan a good retirement, it is advisable to invest in equity funds such as equity linked savings scheme for tax benefits, large cap funds, etc. Diversified equity funds too are best amongst this category. These certainly reap higher returns and therefore are the best for long-duration investment plans.

Research indicates that staying invested in equity funds for a longer duration would help through the power of compounding and therefore get better returns in terms of profit. In this way, you also get to grow significantly during your initial investments. Some of the best long-duration mutual funds are ICICI Prudential Bluechip Fund Growth, ICICI Prudential Bluechip Fund Institutional Growth, HDFC Top 100 Fund growth, etc.

Your take…

Opting for duration mutual funds would completely be your decision. This is because, ideally you need to take into consideration your life goals, plan accordingly and then invest in the type of funds that would be best suited for your requirements. It is that easy to invest! Investing is nothing but putting money back in your wallet to plan for a better tomorrow. After all, money once invested will definitely come back to you one day or the other.

However, discipline is where we actually lack in. Therefore, experts suggest to stay invested for the term you have actually opted for getting the desired returns rather than exiting it in between! This would fetch you better returns.

So, start investing a few thousands and enjoy the perks of lakhs of rupees by following the above tips!

Happy Investing

Recommended Read: How will I Make Right Mutual Funds Investment?

Janhavi Shinde
Written by Janhavi Shinde
Right from being a Flight Attendant to a Banker and now to a Content Writer, she has tasted success in all the fields. The kinda girl who loves pets and knows how to manage difficult people and events.