Complete Guide Medium Duration Debt Funds 2025
Medium Duration Debt Funds is a quite popular investment option in India currently, considering that more investors get to know of the risk profiles, returns and capital preservation strategies. As the RBI fluctuation in its interest rates and market volatility is likely to remain in 2025, these funds have received increasing interest on their risk-reward balance.
This paper will provide all the information necessary to understand Medium Duration Debt Funds including their characteristics, advantages, risks, the reason why they are important in the year 2025, the performance of these funds in comparison to others, and what type of investor can gain the most.
The Medium Duration Debt Fund: What is it?
A medium duration debt fund is a debt mutual fund governed by SEBI which majorly invests in the debts. The portfolio maturity as required by SEBI has to be 3 to 4 years. These funds will invest in a combination of government securities, corporate bonds, debentures and money market instruments but usually do not invest in equities.
These funds are intending a stable income in the medium term and interest rate and credit risks are attempted to be kept in check. When the investors desire higher returns than short-term funds, and less volatility compared to long-term funds, they mostly consider medium-duration debt schemes.
Main Characteristics or Value of Medium-term Debt Funds
- The mean portfolio maturity is required to be within the range of 3-4 years.
- Investment entails a combination of both government and corporate debts.
- Compared to longer duration, moderate interest rate risk and moderate or low credit risk.
- The best choice of an investor with an investment horizon of 3-4 years.
- They are open-ended, and that is, they can be redeemed at any time by the investor at NAV.
- The post tax returns may be appealing particularly following the introduction of new tax laws since 2023 in debt funds.
How Medium Duration Debt Funds perform in India in 2025?
Subtle inflation, international economic uncertainties and regular adjustments in the policy rates by the RBI affect the policy environment in the year 2025. Such debt funds invest in those bonds that have residual maturities averaging at 3-4 year and that target to lock in higher returns as compared to short-term debt plans but are easy to handle in terms of risk.
In most instances, managers of funds go through a mixture of credit quality filters and monitoring macro factors such as inflation, fiscal policy and liquidity conditions before selecting the portfolio.
Did you know?
The net assets of the medium duration funds reached [?]75,000 crore in 2024 and it became one of the fastest growing categories of debt funds among retail and HNI investors.
Advantages and Disadvantages of investing in Medium Duration Debt Funds
Pros
- Have potential of high returns compared to liquid or ultra short term funds.
- Reduced price volatility than longer date gilt funds or dynamic bonds.
- The fund will gain in case RBI reduces the policy rates in the years to come.
- Appropriate to diversify conventional portfolios using FDs and savings accounts.
- Can also be used as a cheap option among individuals with short term investment aims such as buying a car or educating children.
Cons
- Still carry interest rate risk, i.e. the value can be decreased in case of an increase in the rates more than expected.
- The returns are not assured and they are subject to the market conditions.
- Money may assume a certain amount of credit risk, and thus, they cannot eliminate the risk of default.
- New rules could make taxation less attractive than equity funds in the case of short duration investors.
Who should invest in medium term debt funds?
These funds are appropriate to investors with an investment horizon of 3-4 years and who are not risk averse. They are not risk-free and are not intended to suit people that need assured returns.
They work best for:
- Those investors who want to outperform fixed deposit rates on medium-term basis.
- Individuals whose risk appetite is low or medium.
- The individuals who want to target capital safety and modest, though consistent growth.
- Those having financial plans in the next 3-4 years.
Expert Insight:
According to the top fund managers in India, Medium Duration Funds are recommended when it comes to parking lump sums because you are not comfortable with equity volatility but do not want lower conservative yields on debt.
How to Invest in Medium Duration Debt Funds Performance and What will be the Returns in 2025?
In the past, these funds have provided an average annualized performance ranging between 6 percent and 8 percent in the past five years (2020-2024). But the reality of returns in 2025 will be determined by the interest rate trajectory of RBI, and inflation rate, and credit.
As an example, during the FY 2023-24, the average of the 10 most performing schemes was approximately 7.2 percent, the best having 8.4 percent and the worst among the leaders being 6.3 percent. It should be noted that the past performance does not assure future performance.
| Year | Category average returns (percent) | RBI Repo rate (percent) | CPI Inflation rate (percent) |
|---|---|---|---|
| 2021 | 6.0 | 4.0 | 5.2 |
| 2022 | 6.8 | 4.9 | 6.0 |
| 2023 | 7.2 | 6.5 | 5.6 |
| 2024 | 6.9 | 6.5 | 5.4 |
What is the difference between Medium Duration Debt Funds and Short and Long Duration Funds?
| Aspects | Short Duration Fund | Medium Duration Fund | Long Duration Fund |
|---|---|---|---|
| Average Portfolio Maturity | 1 -3 years | 3-4 years | 7 years or more |
| Interest rate sensitivity | Low | Moderate | High |
| Return Expectation (2024 avg) | 5.6% | 6.9% | 7.5% |
| Suitability | 1-3 years horizon | 3-4 years horizon | 7+ years horizon |
| Risk (NAV Fluctuations) | Low | Moderate | High |
Medium Duration Funds are a much-needed close in between between the short pause instruments and those who would prefer to invest a small part more, but do not want to risk a lot of volatility of long bond funds.
Did You Know?
With the reclassification of SEBI in 2018, a large number of AMCs have tweaked their portfolio structuring to conform to maturity requirements of individual durations based selections. This made the selection of funds more transparent to the investors.
Medium Duration Debt Funds in 2025 Taxation
Off April 2023, with new taxation rules, the debt funds, such as medium duration schemes are taxed in accordance with the tax slab of the investor, in other words capital gains will be considered as short-term despite holding period unless the structure has at least 35 percent equity (which most do not).
Therefore, in the case of falling in the 30 percent tax bracket, post-tax return is less than the pre-2023 tax regulations. Nevertheless, at least they are cost effective to the low tax bracket or when compared to conventional fixed deposits in the shorter term.
What Are the Risks in Medium Duration Debt Funds?
- Interest Rate Risk: The interest rates are on the increase which decreases the bond prices. AVA shall fall in the short run, especially in cases when you need to redeem at an early stage or in an increasing rate cycle.
- Credit Risk: It is possible that some schemes increase yield by holding lower rated papers thereby increasing risk of issuer default or downgrade.
- Liquidity risk: In case of a strained market environment, it may not be easy to sell some of the debt papers.
- Reinvestment Risk: You may be forced to reinvest the coupon or interest at a lower rate in case the rates decline when you hold it.
People Also Ask
Q: Are the medium duration safe funds in comparison to equities?
A: They are not risky as compared to the equity funds and are not risk-free. It has interest rate and credit risk, which are lower than long-term debt funds.
How to select appropriate Medium Duration Debt Fund?
When picking a fund, these points have to be given careful consideration:
- Find a consistent track record in at least three to four years.
- AA or better credit quality of portfolio.
- Revise exposure limits with regard to less rated or unrated papers.
- Justify expense ratios - the lower the better the holding period.
- Read scheme information document to find out about investment philosophy.
Before making final investment, it is always a good idea to consult certified financial planners.
Expert Insight:
Medium duration funds SIP (Systematic Investment Plan) will provide cost averaging in rupee and timing risk will be reduced to a great extent among most investors.
What is the optimum timing of putting money in medium period Debt Funds?
These are funds that are appropriate almost always and when interest rates are likely to stabilize or begin to decline, the is usually the best opportunity since bond prices are likely to increase in falling rate regimes. But given that it is impossible to time interest rates, staggered investments within the 6-12 months can assist.
Future Projections and Trends of Medium Duration Debt Fund in 2025
The inflow of debt market into the market will be experienced in 2025 when the investors may be diversifying beyond the equities to insure themselves against fluctuations. The majority of the top AMCs have perfected their portfolio policies with emphasis on high credit quality and liquidity control.
The position of RBI is widely neutral, though the estimates of inflation are fairly tame, and there is a chance of pursuing medium term plans to be steady and could even stand to gain when the rate cuts are once again adopted in the later quarters of the year.
This category is expected to increase further in 2025 with the entry of new retail investors into space and increased education of investors.
People Also Ask
Q: Is NRIs investment in medium term debt funds possible?
A: Yes. India NRIs can invest in most of the large mutual funds in India, but some countries can be restricted due to local restrictions.
A Quick Comparison of Medium Duration Debt Funds and Fixed Deposits
| Characteristics | Bank Fixed Deposit | Medium Duration Debt Fund |
|---|---|---|
| Average Return (2024) | 6.9% | 5.8% |
| Risk | Moderate | Very Low |
| Liquidity | High (can leave at any time) | Depends on tenure |
| Taxation (since 2023) | Marginal Rate | Marginal Rate |
| Appropriate to | 3-4 yrs, moderate risk | Any tenure, no risk |
| Early leave penalty | None (exit penalty may occur) | Penalty on early leaving |
Best Practices: Investments in Medium Duration Debt Funds
- Correlate your risk and objectives with capital duration and credit profile.
- Better to take SIPs or graded entrance to average cost and decrease risk.
- Check at least once a year to make sure that the portfolio is stable and to monitor whether there are any drastic changes in strategy or ratings.
- Funds with a high exposure to low-rated papers should also not be bought unless you possess an extremely high risk tolerance.
Did You Know?
Since 2023, SEBI has strengthened the disclosure standards of mutual funds by simplifying the process of comparing and tracking the portfolios of debt fund.
TLDR or Quick Recap
Medium Duration Debt Funds are mid-range ventures between the temporary debt and the fluctuating long-term bonds with the average above 3-4 years of maturity. These funds will continue to present themselves as a good choice to risk-conscious Indian investors in 2025 who want a combination of safety, liquidity and returns marginally better than the conventional deposits. They are fairly sensitive to interest rates and both credit and liquidity risks. Appropriateness is based on your risk comfort, time horizon and financial objectives. Before investing, always verify fund information, previous history, quality of portfolio and alignment with tax implications.
FAQs - People Also Ask
Q1: What is the Median of Medium Duration Debt Funds?
A1: The maturity should be 3 to 4 years on average according to SEBI regulations.
Q2: Do medium lasting funds have an open-ended nature?
A2: Yes, your units can be redeemed at NAV at any point in time.
Q3: What is the taxation on returns on these funds after April 2023?
A3: The capital gains taxed are short-term capital gains and according to your income tax slab.
Q4: Could these funds substitute the fixed deposits?
A4: No, they are more risky and may have a variable NAV. Keep them as a portion of portfolio that is expected to produce better returns and do not replace them entirely.
Q5: what is the primary risk of medium term debt funds?
A5: The main risks are the movement of the interest rates and the credit (default) risk.
Q6: What are the best ranked medium term debt funds in 2025?
A6: This depends; frequently review ratings and performance of reputable mutual fund websites.
Sources
- SEBI Guidelines
- AMFI India
- Value Research Online
- ET Money
- Nippon India Mutual Fund
