For a few years, mutual fund experts had been saying investors invest in short- term funds or fixed maturity plans. The latter was suggested more for tax benefits.

But the Reserve Bank of India's policy statement on Tuesday has improved the prospects of medium- term income and long- term funds as well. After the dovish stance, fixed income investors can start looking at medium- term income funds. According to data from Value Research, only a few funds were geared to take advantage of a rally in bond prices on Tuesday due to overexposure to short- term paper. Six of 83 income funds had their average maturities above 10 years. The net asset values ( NAVs) went up 50 basis points on Tuesday. Another 26 had maturity between five and 10 years and their NAVs gained 36 bps. More than half had maturity between one and five years and NAVs were up 21 bps per cent. Bond yields fell to a four- month low on Wednesday.

Retail investors have been sad with debt funds in the past year. ICICI Prudential Long Term Fund (regular plan), top performing in three months, has returned 6.33 per cent and on an annualised basis 14.08 per cent. It is an exception.

All other top performing funds, such as ICICI Prudential Income Fund, UTI Bond Fund, Kotak Bond Fund, HDFC Income Fund, which have returned 5.4- 6 per cent in three months, have returned - 0.8 to two per cent in one year. When RBI decided to suck out liquidity in July, the constant rise in yields caused these schemes to perform badly. In the past year, the yields of 10- year G-Sec have risen from 7.21 per cent to 8.62 per cent, a rise of 141 basis points.

While it makes good sense to enter a good medium- term fund, investors should match their need for money to investment.

Investors can look at newer debt funds investing aggressively in corporate paper. There are Templeton India Corporate Bond Opportunities Fund, HDFC Corporate Debt Opportunities Fund and Edelweiss Debt and Corporate Opportunities Fund. With the outlook for the economy improving, these funds are likely to do well. But remember there is an exit load of one to three per cent, depending on the time of exit.