Understanding Medium-Duration Mutual Funds: A Smart Investment for 2024

e likely to hear a lot more about medium-duration funds. The reason? A growing number of mutual fund advisors are recommending these schemes to their clients. As per SEBI (Securities and Exchange Board of India) regulations, medium-duration funds must invest in debt and money market instruments with a Macaulay duration of three to four years. This means these funds are particularly suited for investors who have a three to four-year investment horizon.

Before you decide to invest, it’s important to check the portfolio duration of the scheme to ensure it aligns with your investment timeline.

Top Medium-Duration Funds to Consider in August 2024

If you’re considering investing in medium-duration funds this August, here are some of the top schemes that have shown promise:

SBI Magnum Medium Duration Fund
HDFC Medium Term Debt Fund
Bandhan Bond Fund – Medium Term Plan
Axis Strategic Bond Fund

These funds have been selected based on specific criteria that emphasize both performance and risk management.

Methodology Behind the Selection

The funds mentioned above were shortlisted using a rigorous methodology that focused on key parameters designed to identify the best-performing medium-duration schemes. Here’s a closer look at these parameters:

1. Mean Rolling Returns

The first criterion used to assess the funds was their mean rolling returns, calculated daily over the past three years. Rolling returns provide a more consistent measure of performance by smoothing out short-term fluctuations in the market. By looking at rolling returns, investors can get a clearer picture of a fund’s long-term performance.

2. Consistency Over the Last Three Years

Consistency is another crucial factor in evaluating mutual funds. The Hurst Exponent (H) is used to measure the consistency of a fund. This statistical measure helps in determining how predictable or random the returns of a fund are.

3. Downside Risk

Managing risk is a critical aspect of investing, especially in debt funds. Downside risk measures the potential for negative returns. This parameter only considers the days when the mutual fund delivered negative returns. Here’s how it’s calculated:

X = Returns below zero
Y = Sum of all squares of X
Z = Y / Number of days used for calculation
Downside risk = Square root of Z

By focusing on downside risk, investors can gauge how much they stand to lose on their investment during downturns. The lower the downside risk, the better the fund is at protecting investors’ capital during market declines.

4. Outperformance

The final parameter considered is the fund’s ability to outperform its benchmark. This is measured by the difference between the fund’s return and the benchmark return, using rolling returns. By analyzing the active return (Fund Return – Benchmark Return), investors can see how well the fund manager is doing relative to the market.

Asset Size Consideration

When it comes to debt funds, the size of the fund’s assets under management (AUM) is an important consideration. For the funds included in this list, a minimum asset size of Rs 50 crore was set as a threshold. Larger funds tend to be more stable and better equipped to handle market fluctuations, making them a safer bet for investors.

Conclusion: Why Medium-Duration Funds Could Be a Strong Choice

In summary, medium-duration funds offer a unique opportunity for investors looking to benefit from a potential decline in interest rates. With a typical investment horizon of three to four years, these funds strike a balance between short-term flexibility and long-term growth potential. By carefully selecting funds based on performance, consistency, downside risk, and outperformance, you can enhance your chances of achieving superior returns.