Long duration funds are debt-oriented funds that invest in debt and money market instruments. As per SEBI's rules, a long duration mutual fund must maintain a portfolio Macaulay duration of more than 7 years. Macaulay duration is a measure of how sensitive the fund's bond portfolio is to interest rate changes.

These funds take on a longer interest-rate exposure than schemes like short duration funds and medium duration funds. That also means their NAV can move more when interest rates change.

Long duration mutual funds can offer capital appreciation along with interest income from the debt securities they hold.

You can consider investing in these funds if:

• You have a long-term financial goal: If you don't need the money in the near future, you have more time to deal with short-term NAV movements. A long-duration fund can be considered for a longer-term debt allocation.
• You understand interest-rate risk: These funds can react strongly to changes in interest rates. If a temporary fall in NAV would make you uncomfortable, shorter-duration categories may be worth exploring.
• You want debt exposure alongside equity: If your portfolio already has a large-cap fund, mid-cap fund or other equity funds, adding debt can give your portfolio a different type of exposure.
• You can stay invested through market cycles: Long duration mutual funds can go through periods of weak performance when rates move against them. You need enough patience to avoid making decisions based only on short-term NAV changes.

When you invest in these funds via SIP or a lump sum, the fund manager uses that money to buy debt and money market instruments. They maintain the portfolio Macaulay duration of more than 7 years.

During the process, the fund can earn interest income from the securities it owns. Also, the prices of those securities can change in the market. Both these factors can affect the fund's NAV.

To understand how this affects your investment, let's look at a scenario. Suppose you invest a lump sum of ₹20,000 in a long-duration scheme when its NAV is ₹20. You receive 1000 units.

Later, bond prices rise because market interest rates fall. If the fund's NAV moves to ₹21, your 1000 units would be worth ₹21,000 (1000 x ₹21). But the opposite is also possible. If rising interest rates push the NAV down to ₹19, your investment would be worth ₹19,000 (1000 x ₹19).

This is why long duration schemes can show noticeable short-term gains or losses even though they invest in debt securities.

• Potential to benefit from falling interest rates: Bond prices generally rise when market interest rates fall. Since these funds have longer duration, they can be more sensitive to this movement.
• Exposure to a mix of debt securities: The portfolio can include government securities, corporate bonds and other eligible debt or money market instruments. This gives you exposure to several securities through one fund.
• Can add balance to your equity portfolio: Debt funds behave differently from equity funds. Adding a long duration fund can therefore give your portfolio exposure to another asset class.
• Opportunity for both interest income and price gains: The securities can generate interest income for the portfolio. Changes in bond prices can also create returns, particularly when interest rates fall.

• High interest-rate sensitivity: This is the biggest risk for long duration funds. Bond prices tend to react more to interest-rate decisions. A rise in rates can therefore put pressure on the fund's NAV.
• Short-term NAV volatility: Even though the fund invests in debt, its NAV can fall for a period. Debt does not mean the investment value will always move up.
• Credit risk: A bond issuer may face financial problems or fail to make payments. The actual credit risk depends on the securities held by the particular scheme.
• Liquidity risk: Some debt securities may not be easy to sell quickly at a favourable price, especially when the market is under pressure.
• No guaranteed return: Long duration funds are still mutual funds, not fixed deposits. Their returns depend on the securities held, interest rates, credit events and other market conditions.

These three categories mainly differ in the duration of their portfolios. That difference can have a big impact on how volatile their NAV can be. Let's compare them across various factors:

Your choice doesn't have to stop here. Depending on your goal, you can also explore other debt schemes such as corporate bond funds, gilt funds, dynamic bond funds, or short duration funds.

There is no single fund that will be right for everyone. When looking for the best long duration mutual funds for your needs, check these points:

• Look at the portfolio quality: Check what the fund owns and how much is invested in government securities, high-rated corporate debt and other instruments. Don't look at returns alone.
• Check the actual duration: The category requires a Macaulay duration of more than 7 years, but the fund's actual duration can vary. A longer duration can mean greater sensitivity to rate fluctuations.
• Study performance over different periods: Look at 1-year, 3-year or longer-period performance where available. Rolling returns can also help you see how the fund performed across different market periods instead of relying on one starting date.
• Compare expense ratio: Fund expenses reduce your returns. Compare the expense ratio of similar schemes before investing.
• Check the fund's risk profile: Read the scheme's riskometer and understand the risks involved. Risk levels can vary between schemes.

Before finalising the scheme, always ensure that it matches your time frame and invest only that money in long-term plans which you may not need in the near future.

Once you pick the preferred long duration funds to invest in, starting a SIP on Millions only takes a few taps on your smartphone:

• Get the Millions app from the Play Store or iOS App Store.
• Open your free account by entering your details and completing your KYC.
• Once you're logged in, search for the mutual funds section and select the long duration fund that fits your investment needs.
• Tap SIP and choose how often you want to invest (monthly, weekly or daily).
• Enter your investment amount and SIP date, then complete the payment.

That's it. You can start with an amount that fits comfortably into your budget. Before investing in a long-duration fund, make sure you understand why you are choosing this debt fund. If you want less interest-rate exposure, you can also compare it with medium-duration funds, short-duration funds or corporate bond funds.