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Business News/ Mutual Funds / Amid the bull run, why should you invest in long duration debt mutual funds? An explainer
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Amid the bull run, why should you invest in long duration debt mutual funds? An explainer

There are seven long duration debt mutual funds and total assets under management (AUM) of these schemes amount to ₹9,875 crore as on Nov 30, 2023. Funds amounting to ₹149 crore were invested in November alone

Investors are encouraged to invest in long duration debt schemes when interest rates are expected to fall Premium
Investors are encouraged to invest in long duration debt schemes when interest rates are expected to fall

At a time when fixed deposit (FD) interest rates are on an upswing and investors are encouraged to lock their investment in these deposits, one can explore the prospect of investing in another financial instrument i.e., debt mutual funds particularly the long duration ones.

Although debt schemes became relatively less attractive in early 2023 after the phasing out of indexation benefits in Finance Bill 2023, the investors still opt for them for the assured returns they offer. 

Experts argue that the ongoing bull market has triggered the need for portfolio rebalancing which means investors are recommended to sell some of their equity assets and redeploy the proceeds to buy debt schemes so that their predetermined equity-debt ratio remains intact.

Deepesh Raghaw, a Sebi-registered investment advisor, in a recent interaction with Livemint pointed out, “Investors should check their portfolio and if it's highly skewed in favour of risky assets, then it is recommended to reduce the allocation.

There are a total of seven schemes which fall in the category of long duration mutual funds. 

Total assets under management (AUM) of long duration debt funds amount to 9,875 crore, as on Nov 30, 2023. Out of this, more than 149 crore was invested in the month of November alone. It is vital to note that long duration funds’ AUM is far less than that of short duration and medium duration debt schemes, which have an AUM of over one lakh crore and 26,598 crore, respectively. 

Let us first understand what long duration mutual funds are.

Long duration debt funds

These mutual funds refer to schemes which carry out investment in debt and money market instruments with Macaulay duration of the portfolio greater than seven years, according to Sebi’s guidelines on categorisation of schemes. 

Macaulay Duration gives the time (in years) in which the investor will be able to recover the price of the bond paid in the forms of interest payments and principal repayment. 

Why should you invest in these funds? 

Essentially, investors are encouraged to invest in debt mutual funds in order to fulfil the debt requirement of the portfolio. In other words, to comprise a well-rounded portfolio, investors are supposed to invest in debt as well as equity schemes. 

The debt mutual funds tend to invest in central government securities, corporate bonds, treasury bills, certificates of deposit (CDs), commercial papers, as well as state development loans (SDLs).

And within the debt portion of the portfolio, one can choose between short duration, medium duration and long duration funds – based on their risk appetite and prevailing market conditions. 

 

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Published: 05 Jan 2024, 09:42 AM IST
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