Long Duration Fund - A Duopoly
MF shots (Part 9)- is an exclusive series of article which will try to explain in each category of mutual fund. This article focuses on Long Duration funds which invest for more than 7 years.
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Estimated time to read - 4 minutes
Overview -
MF shots - name describes itself where Mutual Fund categories are explained in a brief manner to avoid clutter of information. The current article is continuation of MF shots series by Cellestial Wealth. Previously I have written about short term & medium term debt mutual funds of which can be found by clicking on each category. Each article takes less than 6 minutes but states a few key pointers to be looked upon when choosing a category.
Overnight fund – invests in securities with maturity of 1 day.
 Liquid fund – invests in securities with maturity of 91 days.
Ultra short duration funds – invests in securities with maturity of 3-6 months
Low duration funds - invests in securities with maturity of 6 months to 1 year.
Money market funds - invest in securities with maturity upto 1 year.
Short duration funds - invest in securities with maturity ranging from 1 to 3 years.
Medium duration funds - invest in securities with maturity ranging from 3-4 years.
Medium to Long Duration funds - invest in securities with maturity raanging from 4-7 years.
Brief –
This category stands out from other debt & equity categories as there are only 2 mutual fund schemes present in this category which might be due to lack of investor awareness or poor interest seen by Asset Management companies . Whatever might be the reason the sole reason behinds this article is to keep discovering the categories.
Investment objective –
It invests in securities which have maturity of more than 7 years
Suitable for which type of goals –
Goals which have horizon of more than 7 years & are majorly invested for protection of capital rather than growth of capital. If one choses growth of capital over 7 year horizon then equity is more appropriate.
What parameters to check –
1.     Government versus corporate security weighing -
The time horizon of the category is long which increases credit risk (i.e. risk of default) in portfolio. Although the government security will yield slightly lower compared to corporate ones but provides lower credit risk.
2.     Fund manager experience –
The fund manager decides about selection of securities & maturity of securities. Hence, it is critical to check expertise before investing in the fund.
Interesting insights from the category -
1.     Only 2 mutual funds are available to invest in the category.
2.     The AUM of category is at Rs 2600 crore.
3.     The expense ratio of Nippon India is 0.25% lowest & highest for ICICI Prudential at 1.40%.
4.     Both funds have 90%+ allocation to government securities.
5.     Due to recent increase in interest rates both funds have negative 1 year returns
Conclusion -
Long duration fund category looks underpenetrated currently both from investor & AMC’s perspective given inefficiency in the market & other alternatives offered mostly providing lower returns than long duration funds. Also, due to interest rate cuts in the recent past the returns look higher than would have been in constant interest rate scenario. The current expectations for increase in interest rates doesn’t bode well for this category which requires one to overlook the category for a period of time & try to invest when interest rates are expected to remain constant or reduce in future.
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I am AMFI registered Mutual Fund Distributor . In case you have mutual fund queries or would like to invest in mutual funds, let me know on my Email - chirag.jain48@yahoo.com or +91-7567473055.
AMFI registration number - ARN-187955