What Are Long Duration Funds

Long Duration Funds select bonds/debt for investment such that average maturity (remaining) period for portfolio is higher than 7 years (Macaulay duration).
What Are Long Duration Funds
3 min

Among the different market-linked investment options available, very few of them cater to conservative investors focused on capital preservation like long duration funds. These funds are ideal for those looking to gain exposure to good-quality fixed-income securities.

In this article, we are going to look at what a long duration fund is, who should invest in it, its advantages and disadvantages and how they are taxed in the hands of the investor.

What are long duration funds?

Long duration funds are a category of mutual funds that invest exclusively in various debt securities and money market instruments with long maturity periods greater than 7 years. Non-convertible debentures, government bonds and high-quality corporate bonds with good credit ratings are some examples of the kind of fixed-income securities that long duration funds invest in.

Why to invest in long duration funds?

Now that you are aware of the meaning of long duration funds, let us look at the kind of investors who should consider investing in them.

Since long duration funds invest only in debt securities with maturity profiles extending beyond 7 years, they are suitable for investors with a long-term horizon. This is because such investors are generally capable and willing to withstand fluctuations in the market and interest rates over a long period.

Additionally, investors seeking capital appreciation and income generation through fixed-income securities may also consider including the long duration funds in their portfolio along with other debt funds for diversification purposes.

Advantages of long duration funds

Long duration funds offer a wide range of benefits to investors. Let us discuss some of the key advantages in more detail.

  • Diversification
    Long duration funds are usually invested in a basket of corporate and government debt instruments. Such diversification reduces the risk of default and the negative impact of issuer-specific events.
  • Ideal for falling interest rate environments
    These funds generally tend to perform well when the interest rates fall. In a falling market environment, bond prices rise, leading to potential capital appreciation for investors.

Drawbacks of long duration funds

Despite the advantages, long duration funds have two major limitations. Investors must ensure that they consider these drawbacks before investing in these mutual fund schemes.

  • Interest rate risk
    Due to the extended maturity periods, these funds can be very sensitive to changes in interest rates. The net asset value of the fund tends to decline in a rising interest rate environment and may potentially lead to losses.
  • Credit risk
    In a bid to achieve higher returns, some long duration funds invest in corporate debt securities with low or substandard credit ratings. These funds often suffer from credit risk and are always under the threat of potential defaults.

Factors to consider before investing in long duration funds

If you are planning to invest in long duration funds, here are some factors you must consider before including them in your investment portfolio.

  • Investment goals
    Due to the long maturity periods of the funds’ constituents, you can consider investing in these funds if you have long-term financial goals to meet.
  • Investment horizon
    Long duration funds could be suitable investment options if you intend to stay invested for a long time.
  • Risk
    Since long duration funds are more susceptible to interest rate risk and credit risk, investing in them makes sense only if you have a high tolerance for risk.
  • Expense ratio
    The expense ratio represents the fees that the Asset Management Company (AMC) levies for operating and managing a fund. Higher expense ratios could negatively impact your returns. Therefore, it is advisable to invest in a fund with a low ratio to prevent your returns from getting diluted too much.

Taxation of long duration funds

The Union Budget 2023 brought in a major amendment that changed how debt funds including long duration funds are taxed with effect from April 01, 2023.

The capital gains from such funds, irrespective of the holding period, are added to your total income and are taxed at the income tax slab rate applicable to you. The dividends from long duration funds, if any, are also taxed in the same way.


Long duration funds could be an attractive investment option for investors looking for long-term exposure to the debt market. Although these funds offer capital appreciation compared to short duration debt funds , they are not without their risks. As a potential investor, it is advisable to consider the associated risks and factors such as your investment goals, risk tolerance levels and investment horizon before investing.

If you are unsure of which long duration fund to choose for your portfolio, the Bajaj Finserv Mutual Fund Platform may be able to help. With over 1,000 options to choose from and a powerful mutual fund compare tool, you can quickly determine the fund that is right for you.

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Frequently asked questions

What is the meaning of long duration funds?

Long duration funds are a type of debt mutual fund that invests in a basket of debt and money market instruments with maturities greater than 7 years.

Which fund is ideal as a long-term investment?

An ideal fund for long-term investment depends on various factors such as your risk tolerance, investment goals and time horizon. For example, if you are a conservative investor focused on capital preservation, long duration funds could potentially be a good investment option.

How are the dividends from long duration funds taxed?

The dividends from long duration funds are added to your total income and are taxed at the income tax slab rate applicable to you.

Is the risk in long duration funds higher compared to other debt funds?

Long duration funds generally carry a higher interest rate risk compared to other debt funds. This is because these funds invest in debt securities with maturities greater than 7 years, making them more sensitive to interest rate changes.

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