Debt Fund Investment: Long vs Short Duration Funds:In the category of debt funds, long duration funds have given the highest returns in the last one year. Due to this better performance, the attention of a large number of investors has turned towards these funds. Not only has fund investment in this category increased, but many new long duration debt funds have also been launched. But will it be a good decision to invest in it given its excellent recent performance? Or was the performance of long duration funds over the past one year an exception that cannot be expected in general?
1 Year Performance of Long Duration Funds
Long duration funds have given an average return of 11.4% in the last one year. The 1-year return of direct plans of all 7 long duration debt funds present in the data base of Association of Mutual Funds in India (AMFI) has been between 11.27 to 12.42 percent.
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How much return did other debt funds give?
As compared to long duration debt funds, the 1 year returns of direct plans of top 10 medium to long duration debt funds have been between 9.30% to 10.41%. Whereas the 1 year return of direct plans of top 10 short duration funds is 8.67% to 9.94%. This means that in terms of returns in the last one year, long duration debt funds have won in all these categories. So, should this be interpreted to mean that investors who want to invest money in debt funds should now turn to long duration funds only? Actually, before taking any decision in this regard, you have to understand why the returns of long duration debt funds have been so good during the last one year? It also needs to be understood whether this is a general trend or an exception?
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5 and 10 year returns of long duration debt funds
Long duration debt funds may have given an average return of 11.4% in 1 year, but their average return in the last 5 years has been 6.88% and the average return in 10 years has been only 8.17%. These figures show that the recent good performance is a temporary trend. The success of Long Duration Funds is mainly based on some special economic factors in recent times.
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Why do long duration funds give better returns in 1 year?
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Joining the JPMorgan Bond Index:Indian government bonds have been included in the JP Morgan Bond Index during this period. This brought large-scale investment from foreign investors, which increased bond prices.
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Interest rates expected to be at peak: Investors feel that interest rates have reached their peak and are likely to decline in the future instead of increasing further. In this hope, they want to take advantage of the high yield of existing bonds, which has increased their demand.
Relationship between bonds and interest rates
It is also important to understand that when interest rates fall, the demand and prices of old bonds increase. Due to which their returns also increase. On the contrary, when interest rates rise, new bonds become attractive, which reduces the demand and price of old bonds. Long duration funds mostly invest in government bonds. Currently, an average of 96% of the portfolio of these funds is in government bonds, which is a major reason for their recent success.
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When is it beneficial to invest in long duration funds?
There is scope for better returns in long duration debt funds only when there is a possibility of decline in interest rates. In such a situation, if an investor wants to earn high returns in a short period of time during a fall in the rate cycle, then he can earn profits by taking interest rate risk. But this strategy cannot be called very good because the main objective of investing in debt funds is to earn stable returns.
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Long Duration FundsWhy not good for long term?
Generally, long duration funds can outperform short duration funds only when interest rates fall. Changes in interest rates and the possibility of changes have a significant impact on the returns of long duration debt funds. There are a lot of fluctuations in their returns, whereas the main objective of investing in debt funds is to get stable returns. The longer the investment period, the greater the possibility of change in interest rates. That is why long duration funds are not considered better for long term investments.
What should investors of debt funds do?
In such a situation, the question is that if long duration debt funds cannot be considered a better investment option, then which ones should be considered? Those who want to invest in debt funds, where should they invest? To know the answer to this question, let’s take a look at the returns of the last 5 years of debt funds of different durations.
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There are only two 5-year old long duration funds, whose direct plan’s 5-year annual return has been 6.35% to 7.28%.
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The 5 year returns of direct plans of top 5 medium to long duration debt funds have been 7.04% to 7.56%.
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The 5 year returns of direct plans of top 5 short duration funds range between 7.27% to 8.83%.
It is also worth noting that short duration funds are less volatile than long duration funds or medium to long duration debt funds and give stable returns in comparison. That is, overall, the balance of risk and return is better in these. Therefore, those investing in debt should give priority to them. If you are looking for stable and low-risk investments, short duration funds would be a better option.
(Disclaimer: The purpose of this article is only to provide information and not to give advice on investing in any scheme. Take investment related decisions only after taking the advice of your investment advisor.)
