Medium Duration Funds

Medium Duration Funds invest in debt securities and money market instruments so that duration of the fund’s portfolio is between 3-4 years.
Medium Duration Funds
3 min

Medium Duration Mutual Funds represent an important segment, especially for fixed income investors, in the list of investment options available in the mutual fund space in India. These funds aim to strike a balance between risk and return, offering moderate growth potential over a medium-term investment horizon. Understanding these funds is essential for investors looking to diversify their portfolio across different time frames and risk profiles. In this article, we will explore the defining characteristics of Medium Duration Mutual Funds, how they operate, and who should consider investing in them.

What are medium duration mutual funds?

The term 'Medium Duration Mutual Fund' refers to a category of mutual funds that invest in debt securities with a medium-term investment horizon, typically ranging from three to four years. The objective of these funds is to provide investors with a balance of income and capital appreciation while maintaining a moderate risk profile. These funds are particularly suitable for investors who are willing to accept a moderate level of market risk in exchange for potentially higher returns compared to shorter duration funds.

How medium duration funds work?

Medium Duration Funds work by strategically allocating assets across various debt instruments, adjusting the portfolio composition based on interest rate movements and market conditions.

Here's how they function:

  • Portfolio management: Fund managers actively manage the portfolio, selecting securities that align with the fund's investment horizon and risk-return profile.
  • Diversification: By investing in a range of securities, these funds aim to diversify risk and optimise returns.
  • Interest rate sensitivity: These funds are moderately sensitive to interest rate changes, which can affect their NAV (Net Asset Value).

Key points include:

  • Active management to navigate interest rate cycles.
  • Diversification to mitigate risk.
  • Moderate interest rate sensitivity, influencing returns.

Understanding Medium Duration Funds with an example

For example, Mrs. Sharma wants to save money in order to purchase a home 10 years down the line. At the same time, she also wants to ensure that her child has adequate funding for his college education 3.5 years from now, with the money growing at a moderate rate. For the purchase of her home in 10 years, Mrs. Sharma could consider investing in equity mutual funds for possibly higher returns or in long-term duration funds, depending on her risk appetite. But for her child’s education, which is a goal to be achieved in the 3-4 year time horizon, she should consider medium duration funds, which would give her a mix of moderate returns and relative safety for an important expense.

Who should invest in medium duration mutual funds?

Investors considering Medium Duration Mutual Funds should have:

  • An investment horizon of three to four years.
  • A moderate risk tolerance, accepting potential market fluctuations for relatively higher returns.
  • A goal of achieving a balance between income and capital appreciation.

These funds are ideal for:

  • Individuals seeking better returns than short-term investments without committing to long-term funds.
  • Investors looking to park funds for medium-term goals, such as funding education, marriage or a significant purchase.

Which medium duration mutual funds should you invest in?

Medium Duration Mutual Funds invest in a mix of debt instruments, including corporate bonds, government securities, and money market instruments, with the aim of achieving an optimal balance between yield and duration. These funds are designed to:

  • Offer better returns than low duration funds over a medium-term horizon.
  • Provide a relatively stable investment option during volatile market conditions.
  • Cater to investors with an investment horizon of three to four years.

Key characteristics include:

  • Investment in debt instruments with maturities aligning with the fund's medium-term focus.
  • An emphasis on achieving a balance between risk and return.
  • Suitability for investors with an intermediate risk appetite and investment horizon.

Factors to consider before investing in medium duration mutual funds in India

Before investing in Medium Duration Mutual Funds, consider the following factors:

  • Risk profile: Understand the fund's risk level, particularly in terms of interest rate and credit risk.
  • Investment horizon: Ensure it aligns with your financial goals and investment timeline.
  • Returns expectation: Evaluate the fund's performance history to gauge potential returns.
  • Fund management: Assess the fund manager's expertise and track record.

A comparative analysis may include:

  • Risk vs. Return: Balancing higher potential returns against increased risk.
  • Fund manager's track record: Ensuring reliable management.
  • Alignment with investment goals: Matching the objectives of mutual fund with your financial plans.

Medium duration funds vs Equity market

Some inexperienced investors tend to wonder whether medium duration funds can outperform equity market returns. It is better to set your expectations correctly when it comes to medium duration funds right at the beginning. Understand that medium duration funds and equity funds cater to different risk profiles and investment objectives.

  • Nature of investments: Medium Duration Funds invest in debt instruments and are generally less volatile than equity markets. They aim to provide steady returns over the medium term, whereas equity funds target higher returns through potentially higher volatility.
  • Risk and return: While equity funds can offer higher returns, especially in bullish market conditions, they come with increased risk. Medium Duration Funds, on the other hand, offer more stable returns, which might be lower than those of equities during market upturns but can be more resilient during downturns.
  • Investment horizon: For investors with a medium-term horizon, Medium Duration Funds can be more appropriate, as they are designed to optimise returns over such periods without the higher risk associated with equities.
  • Market conditions: In certain market phases, particularly when equities are overvalued or during bearish trends, Medium Duration Funds might relatively outperform equity funds.

While Medium Duration Funds may not typically outperform equity markets in terms of returns, they provide a balance of stability and growth, which can be particularly appealing during uncertain market conditions or for the fixed income component of an investor’s portfolio. They represent a strategic choice for investors seeking moderate growth without the volatility of equity investments, particularly suited for medium-term investment goals.


Medium Duration Mutual Funds offer a viable investment option for those seeking a balance between risk and return over a medium-term horizon. Understanding these funds' characteristics and operational mechanisms is vital for making informed investment decisions. By investing through the Bajaj Finserv Platform, you gain access to over a 1000 mutual funds, including a range of Medium Duration Mutual Funds, facilitating the correct investment strategy to meet your financial objectives.

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Frequently asked questions

Which mutual fund is best for the medium term?
The best mutual fund for the medium term varies based on individual risk tolerance and investment objectives. Reviewing past performance, fund management, and investment strategy is essential.
What is the duration of a medium term investment?
A medium-term investment typically spans three to four years, aligning with the investment horizon of Medium Duration Mutual Funds.
What is medium duration fund?
To simplify the medium-term fund meaning, it is an investment vehicle focusing on securities with maturities within the medium-term range, aiming to balance risk and return.
What is a medium term SIP?
A medium-term SIP (Systematic Investment Plan) involves regular investments in a medium-term mutual fund, providing disciplined saving and investment growth over an intermediate period. You can also use an SIP calculator to help gauge your investment strategy and chart a path to your financial goals.
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