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Long duration debt funds category, on a average has given 12% returns in the last one year, (Mint)
Long duration debt funds category, on a average has given 12% returns in the last one year, (Mint)

'Long duration debt mutual funds suitable for investors with 3-5 years horizon'

Mutual fund managers expect lower returns from the shorter duration funds going forward.

Long duration debt funds have outperformed deft fund categories and even most equity categories in the one year period. The category, on an average has given 12% returns in the last one year, Medium to long duration schemes have given close to 11% returns and short duration debt funds have generated 8.80% returns in the last one year. Mutual fund managers are convinced if investors can bear the short term volatility and have a time period of around five years may go for long duration funds to earn better returns.

"Mutual fund investors should continue to look at high quality funds from safety perspective. Due to excess liquidity, fixed deposit rates offered by large banks have also trended lower over last one year and returns may be similar to what can be expected from investments in shorter duration mutual fund products over 3+ years horizon. Investors having suitable risk appetite and longer term horizon of atleast 3-5 years should look to invest in longer duration products," says Avnish Jain, fixed-income head, Canara Robeco Mutual Fund.

What kind of returns to expect from short duration debt funds?

Mutual fund managers expect lower returns from the shorter duration funds going forward. They say, investors should bring down their return expectations from short duration debt products in future.

"The amount of excess liquidity in the banking system has ensured that shorter end bonds and money market securities have witnessed a substantial easing in yields as well as spread tightening. Given this context, even as the monetary policy cycle is expected to remain easy with policy rates staying low for a bit longer, return expectations from all shorter duration debt products need to recalibrated downwards," says Rajeev Radhakrishnan - Head of Fixed Income, SBI Mutual Fund.

The Reserve Bank of India has cut the benchmark repo rate by 115 basis points since the Covid crisis began, bringing it down to record lows of 4%. M

But, short duration debt funds should form the core portfolio..

"Every investor should have exposure to short duration funds (with largely AAA exposure) as a core holding in their portfolios. Long duration funds carry significant interest rate risk and thus should be a smaller part of the overall portfolio, unless the investor has a specific interest rate view he is looking to express," says Kaustubh Belapurkar, Director - Manager Research, Morningstar India.

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