Debt mutual fund investors give utmost important to the safety of their investments. Perhaps that explains why certain debt mutual fund categories are largely ignored by regular investors. Most mutual fund managers and advisors mostly ask conservative debt investors to stick to safer short-term debt funds like overnight funds, liquid funds, short duration funds, among others.
One debt mutual fund category that is largely overlooked by advisors and investors is medium to long duration/term debt mutual funds. According to Sebi norms, medium to long term funds have a mandate to invest in debt and money market in such a way that the Macaulay's duration of the portfolio is four to seven years. Since these schemes invest in long-term debt instruments, they are considered risky. Even a minor hardening of interest rate could make these schemes extremely risky and volatile. In simple terms, investors might lose money in such a scenario. That explains why advisors do not speak about these schemes often.
According to investment experts, when one invests for a long period in debt instruments, the investor is forced to go through an interest cycle that would have an upward and downward phase. This means the investor would see a lot volatility and sometimes losses when the interest rates start hardening or going up. Investment advisors believe that may conservative investors would not be able to go through such turbulent phase. They can avoid this only if they time their entry and exit into long-term debt funds. Many investors would find it difficult to predict the interest rate movements and getting in and out of the schemes. That explains the advice to stick to short term funds.
However, this doesn't mean that you should not be familiar with the medium and long duration category. Those with risk appetite and long investment horizon, can invest in these schemes with the help of competent mutual fund advisors. The only basic requirement is that you should be aware of the extra risk in these schemes. Here are our recommended mid to long duration debt funds.
Best medium to long duration debt funds to invest in 2020
- SBI Magnum Income Fund
- IDFC Bond Fund Income Plan
- Nippon India Income Fund
ETMutualFunds.com has employed the following parameters for shortlisting the debt mutual fund schemes.
1. Mean rolling returns: Rolled daily for the last three years.
2. Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.
i)When H = 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.
ii)When H <0.5, the series is said to be mean reverting.
iii)When H>0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series
3. Downside risk: We have considered only the negative returns given by the mutual fund scheme for this measure.
X =Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
4. Outperformance: Fund Return – Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.
Asset size: For debt funds, the threshold asset size is Rs 50 crore
(Disclaimer: past performance is no guarantee for future performance.)