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What Are Long Term Debt Funds?

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By Author: Ashish
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Mutual funds are one of the most popular investment options available in the market today. However, with the recent bear phase in the equity markets, the debt mutual funds have found favour with investors. Debt mutual funds are funds that invest a majority i.e. more than 60% of their resources in fixed income or debt instruments. These instruments collect funds and give a fixed return on them till the time they mature. Once these instruments mature, the capital is returned to the investor. These instruments are less risky as compared to traditional equity investments because of the fixed return on the capital invested.

With the recent SEBI reclassification of mutual funds, debt funds were reclassified based on the maturity of the instruments they invested in. A debt mutual fund investment largely got classified into Long Term Debt and Short-term debt funds.

What are long term debt funds?

Long term debt funds are funds that invest in instruments that mature over the medium to long term duration. These funds are:

Medium duration fund:

This is the best online mutual fund investment if you have a time frame of 3 to 4 years. The average maturity of instruments is between 1-4 years. The investor must be looking for an alternative to bank deposits. The portfolio is split between Government securities and other low risk bonds and non-convertible debentures

Medium to long duration fund:

These funds pick instruments whose average maturity period is 4 to 7 years. Around half the capital of this fund is invested in Government securities and the balance in other low risk bonds and non-convertible debentures.

Long duration fund:

If you are a long-term investor with a duration of 7 to 10 years, then this is the right fund for you. These funds put most of their resources into Government securities and bonds from other Government enterprises.

Gilt fund:

Gilt funds invest only in Government securities. These bonds have negligible default risk which is why they are called gilt edged securities. The risk of investing in these securities is very low in terms of returns.

Dynamic bond fund:

This fund has an active strategy where investments keep changing based on which one provides a higher return to the investors.

However, the risk of making a mutual fund investment in a long-term debt fund is that they are sensitive to interest rate risks. The price and interest rate of a security moves inversely. If the price of the bond increases, the yield falls to keep the net interest pay-out the same. The falling yield impacts the net returns to the investors. Long term debt funds are very sensitive to rate changes. Since these long-term debt funds have made an investment into debt at a higher rate of interest, they provide higher returns when the current interest rates fall.

One important thing to remember when you make a debt mutual fund investment is the impact of exit loads. These long-term funds are investments for the longer term. This means if funds are withdrawn within a short period of time, the fund house will charge exit load which will reduce the overall return from the fund.

When you plan to invest in mutual fund, you also must remember the impact of capital gains taxation. Debt funds are liable to capital gains. If you hold a debt fund for 3 years, you will be charged long term capital gain. On the other hand, if you hold it for less than 3 years, you get charged short term capital gains. When you make invest online in mutual fund, you must consider the impact of taxation on the returns.

You can invest online in mutual fund either directly from the mutual fund website or through a broker.

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