Medium to Long Term Fund: SEBI’s 4-7 Year Duration Band Explained

A medium to long term fund is a debt mutual fund that SEBI pins to a fairly specific job: it has to keep the Macaulay duration of its portfolio between 4 and 7 years. That one line in the rulebook decides most of what you will experience as an investor, from how much the NAV jumps when the RBI cuts rates to how badly it can sting when bond yields climb.

Most people pick debt funds by looking at last year’s return. With this category, that is a bit like judging a cricket bat by one innings. The return you saw came mostly from what interest rates did during that period. So let’s look at what the category actually is, what SEBI lets the fund manager do, and how to estimate the damage (or the gain) a rate move can cause, with a simple worked example.

What SEBI says a medium to long term fund must hold

SEBI’s scheme categorisation rules now sit in the Master Circular for Mutual Funds dated March 20, 2026. In the table of debt scheme categories, the Medium to Long Term Fund is item 8. Its rule reads: investment in debt and money market instruments such that the Macaulay duration of the portfolio is between 4 and 7 years.

Two neighbours help put that in context. The Medium Term Fund just below it has a band of 3 to 4 years. The Long Term Fund just above it has to stay above 7 years. So this category sits in the middle of the duration ladder, longer than the funds most people park money in and shorter than the funds that are pure bets on falling rates. If you have read our piece on the medium duration debt fund and its 3-4 year band, think of this as the next rung up.

Notice what the rule does not say. It doesn’t fix the credit quality of the bonds, and it doesn’t say the fund must hold government securities. The category is defined by duration alone. Credit risk is a separate question, and we come back to it below.

Macaulay duration, in plain words

Macaulay duration is the present-value-weighted average time until a bond’s cash flows arrive. A bond paying coupons every year and its principal at the end has a duration shorter than its maturity, because some of the money comes back earlier. A portfolio’s duration is just the weighted average across all its holdings; SEBI’s PRC rules spell out that scheme-level Macaulay duration is the weighted average of each instrument’s duration, weighted by its share of AUM.

The number matters because it links directly to price sensitivity. The closely related measure, modified duration, is Macaulay duration divided by (1 + yield per period). For a small change in yield, the percentage change in price is roughly minus modified duration multiplied by the change in yield. The Wikipedia entry on bond duration sets out both formulas if you want the algebra.

A 4-7 year duration is not a promise about returns. It is a statement about how loudly the NAV will react when interest rates move.

So when SEBI forces a fund into a 4-7 year band, it is really forcing a level of interest rate sensitivity on it. A 5-year duration fund will feel a rate move roughly five times as much as a 1-year duration fund. That is the whole personality of the category.

The escape hatch: the 1 to 7 year band in bad times

Here’s a detail many investors miss. The same SEBI table adds a second line for this category: the portfolio Macaulay duration under an “anticipated adverse situation” is 1 year to 7 years. In other words, if the fund manager thinks rates are about to rise sharply, the fund can cut its duration all the way down to 1 year to protect the NAV.

SEBI doesn’t let this happen quietly. The circular says the characteristics of the scheme should stay the same under normal circumstances, and that the manager may reduce duration down to one year in the interest of investors if they hold a view on interest rate movements in light of an anticipated adverse situation. The AMC must state its asset allocation for that situation in the scheme information document. Whenever duration falls below the 4-year floor, the AMC has to record the reasons with justification, keep them for inspection, place them before the trustees at their next meeting, and the trustees must review the portfolio and report it in their half-yearly trustee report to SEBI.

What this means in practice: the fund you bought for its 5-year duration might, for a stretch, behave more like a short duration fund. That is a defensive move, and it can save you money. But it also means you can’t assume the duration you read in last month’s factsheet is the duration you hold today. Check the latest monthly portfolio.

One fund per house, and where it sits on the risk grid

SEBI’s categorisation rules allow only one scheme per category for each mutual fund house, with exceptions only for index funds and ETFs tracking different indices, fund of funds with different underlying schemes, and sectoral or thematic funds. So each AMC can run just one medium to long term fund. That makes comparison easier: you are comparing one fund from each house, not wading through five near-identical variants.

Then there is the Potential Risk Class matrix, which every debt scheme must use. It places a fund in one of 9 cells based on two maximums: interest rate risk, measured by Macaulay duration, and credit risk, measured by a Credit Risk Value. On the rate side, Class I means duration of up to 1 year, Class II means up to 3 years, and Class III means any duration. On the credit side, Class A needs a CRV of 12 or more, Class B 10 or more, and Class C anything below 10.

Since this category normally runs between 4 and 7 years, it can’t fit inside Class I or Class II caps in normal times. Expect to see it in the Class III row. The column, A, B or C, is where funds in the same category can differ a lot. Moving to a cell with higher risk than the maximum of the chosen cell counts as a change in a fundamental attribute of the scheme, so the PRC cell is a useful ceiling to read before you invest. Our explainer on the short duration fund shows how the same grid looks for a much lower-duration category.

A worked example: what a 0.50% rate move does to a medium to long term fund

All numbers in this example are hypothetical and chosen to make the arithmetic easy. They don’t describe any real scheme.

Say you put ₹1,00,000 into a medium to long term fund. Its portfolio has a Macaulay duration of 5.4 years and a yield to maturity of 7.2% a year. We’ll use annual compounding to keep it simple.

• Modified duration = 5.4 ÷ 1.072 ≈ 5.04.
• If yields rise by 0.50 percentage point, the approximate price change is −5.04 × 0.50% ≈ −2.52%. On ₹1,00,000, that is a drop of about ₹2,520.
• If yields fall by 0.50 percentage point, the move runs the other way: roughly +2.52%, or about ₹2,520 gained.

Now set that against the income. A 7.2% yield works out to roughly 0.6% a month, or about ₹600 on your ₹1,00,000. So a 0.50 percentage point rise in yields wipes out about four months of interest accrual in one go. That’s the trade you’re making in this category. You get a meaningfully higher sensitivity to rates in exchange for the chance of a good capital gain when yields fall.

Compare it with a medium term fund in the 3-4 year band. Take a hypothetical one with a Macaulay duration of 3.5 years and a 7.0% yield. Modified duration is about 3.27, so the same 0.50 percentage point rise costs about 1.64%. Same direction, smaller swing.

And the defensive case. If the manager uses the adverse-situation clause and cuts the duration to 1.5 years at a 7.2% yield, modified duration falls to about 1.40. The same rate rise would now cost only about 0.70%. You can see why the clause exists.

How big a rate rise can a year of interest absorb?

There is a quick rule of thumb for this, sometimes called the Sherman ratio: yield divided by duration. It tells you roughly how far yields can rise over a year before the price loss cancels out the year’s income. For our hypothetical fund, 7.2 ÷ 5.04 ≈ 1.43. So yields would need to climb by about 1.43 percentage points over the year before you’d be looking at a roughly flat total return, before expenses.

The longer your duration, the thinner the cushion that a year of interest gives you against rising yields.

Two caveats. The duration formula is a first-order estimate. It works best for small, parallel shifts in yields; for bigger moves the straight-line estimate gets less accurate, and a second-order measure called convexity is used to close the gap. And fund expenses come out of the yield, so the cushion in your actual fund will be thinner than the gross figure.

Who a medium to long term fund suits, and who it doesn’t

This is not a parking fund. If you might need the money in the next few months, the NAV swings from a single rate move can easily wipe out a quarter’s return. The category tends to make more sense for someone who:

• has a holding period of several years, long enough for the interest accrual to outweigh the occasional rate shock;
• has a view, or at least a comfort level, that rates are more likely to stay flat or fall than rise sharply;
• wants something between a short-duration fund and a long-duration bet, and is fine with the manager shortening duration when conditions turn.

It suits people less well if they react badly to seeing a red NAV. One bad month in a 5-year duration fund can look ugly on an app screen, even though the yield on the portfolio has actually gone up and future accrual will be higher. If you know you’ll sell in a panic, the arithmetic doesn’t matter. The same logic sits behind our broader guide to risk management in trading: size your exposure to what you can actually sit through.

What to check before you invest

A short checklist we’d use on any fund in this category:

1. Current Macaulay duration. Is it actually in the 4-7 year band, or has the manager cut it under the adverse-situation clause? The monthly portfolio disclosure will tell you.
2. Yield to maturity versus duration. Run the yield-divided-by-duration check above. A thin cushion means more NAV pain if rates rise.
3. PRC cell. Class III is expected on the rate side. Look hard at the credit column. A fund in Class C can hold lower-rated paper, which adds a credit risk on top of the rate risk.
4. Portfolio mix. How much is in government securities versus corporate bonds, and how concentrated are the top holdings?
5. Expense ratio and plan. Costs come straight out of the portfolio yield, so compare the expense ratio of the direct and regular plans before you pick one.

None of this needs fancy tools. The factsheet and the SID cover most of it. The point is to understand that you’re buying a level of rate sensitivity, not a fixed return, and to make sure that level fits your timeline.

Disclaimer: This article is for educational purposes only and is not investment advice. The fund figures, yields and amounts in the worked example are hypothetical and do not refer to any real scheme. Mutual fund investments are subject to market risks; read all scheme-related documents carefully and consult a SEBI-registered investment adviser before making investment decisions.