Disadvantages of Medium Duration Mutual Funds
Despite their merits, Medium Duration Mutual Funds come with certain drawbacks that investors should consider. One notable disadvantage is the interest rate risk associated with these funds.
1. Interest Rate Risk: Despite having a shorter duration than long-term funds, medium duration funds are still sensitive to interest rate changes. If interest rates rise, the existing bond prices may decrease, leading to capital losses for investors.
2. Market Risk: Like any investment, medium duration funds are exposed to market risks. Fluctuations in the overall market conditions can impact the performance of these funds. Additionally, credit risk associated with the underlying securities poses a potential threat.
3. Lower Returns: Compared to long-term funds, medium duration funds generally offer lower returns. Investors seeking higher potential returns may find other investment options more appealing, but with the trade-off of higher risk.
4. Inflation Risk: The returns from medium duration funds might not keep pace with inflation over the long term. This could result in the erosion of purchasing power, as the real returns may not be sufficient to maintain the same standard of living.
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