Short Duration Funds

Short-duration mutual funds, a.k.a. short-term funds, are debt funds that invest in debt and money market securities with a portfolio duration of one to three years. These funds offer a great alternative to traditional investment options for investors.

Best Short Duration Mutual Funds

List of the top-performing short duration mutual funds sorted by returns with their AUM and Expense Ratio.

What is a Short-Duration Fund?

As the name suggests, short-term mutual funds invest in short-term debt securities. According to the regulatory guidelines set by SEBI for mutual fund schemes, short-duration funds are required to allocate their investments in debt and money market instruments so that the portfolio's Macaulay duration falls within a one to three-year range.

The Macaulay duration is an indicator of how sensitive the investment portfolio is to fluctuations in interest rates, which can affect the value of debt securities as market rates shift.

These funds primarily invest in short-term debt instruments like certificates of deposit (CDs), commercial papers (short-term corporate IOUs), and government treasury bills. These instruments offer regular interest payments and return your principal investment upon maturity.

The shorter maturity of the underlying securities in short-term funds indicates lower risk compared to long-duration debt funds. Since short-term securities are less sensitive to interest rate fluctuations, the potential for price swings in the fund is also minimised.

Compared to equity funds, short-term funds generally offer lower potential returns. However, they typically provide steadier and more predictable returns than other debt funds with longer maturities.

Key Features of a Short-Duration Fund

• Moderate Risk: Lower risk compared to long-duration funds but higher risk than liquid or ultra-short-term funds,
• Income Generation: Regular income through interest payments,
• Liquidity: Generally offers higher liquidity than long-duration funds;
• Suitable Investment Horizon: Ideal for investors with an investment horizon of one to three years.

Please Note: While short-duration funds aim to provide stability, it's essential to remember that the value of fund units can fluctuate based on market conditions. Investors should carefully consider their risk tolerance and financial goals before investing.

Benefits vs Risks of Investing in Short-Duration Mutual Funds