Low Duration Mutual Funds

Low Duration Funds are open-ended Debt funds that invest

A low duration fund carries three risks, namely, credit risk, interest rate risk, and liquidity risk

As per SEBI’s rationalization and categorization norms, debt can be categorized into 16 types. This categorization is based on strategy and duration to make investor choices simpler, even for the new investor. In this article, we will explore Low Duration Funds, one of those types and various factors you need to consider before investing in them.

What is Low Duration Mutual Funds?

Low Duration Funds are open-ended Debt funds that invest in money market instruments and debt securities. According to SEBI rules, low duration funds have to maintain fund duration between six and twelve months. It means that low-duration funds are likely to invest in short-term debt securities only and have relatively low-interest rate risk.

How do Low Duration Funds earn?

Low duration funds earn from interest as well as capital gains from their debt securities. These funds hold a part of their assets in bonds with credit ratings of AA or lower, which pay relatively higher interest rates. These funds take some credit risk to deliver higher returns, and they also have the potential to generate capital gains.

When interest rates increase, the fund managers cut back on duration to minimize capital losses while earning higher interest rates on new bonds. When interest rates fall, funds increase exposure to longer maturity bonds to push up the fund’s value. Thus, the loss of interest income on new bonds is much lesser than the capital gains on existing bond values. They use strategies based on both credit risk and interest rate risk to generate returns.

Who Should Invest in Low Duration Mutual Funds?

Investors who have an investment horizon of three months or higher and lower risk appetite can invest in low-duration funds. These provide regular income through a combination of interest earnings and capital gains to investors. These funds are also an excellent alternative to keeping money idle in bank savings accounts as they offer better liquidity and higher market‐linked returns.

Advantages of Low Duration Funds

Moderate Risk: Low Duration Funds carry interest rate risk of moderate level. These funds do not usually hold securities having maturities for more than 1‐1.5 years.

 Higher Returns: Low duration funds allow greater credit and duration exposure; therefore, they usually outperform liquid funds. As they can make higher capital gains by holding longer maturity bonds, they also can beat ultra-short duration funds. The average returns of these funds vary between 6.5 and 8.5%.

 Volatility: These funds are the least volatile among all debt funds. With increase in the duration profile of a fund, the volatility also increases.

Factors you should know before investing in Low Duration Mutual Funds in India

Risks and Returns

A low duration fund carries three risks, namely, credit risk, interest rate risk, and liquidity risk. If there are any low-quality debt securities, the risks can be enhanced. Moreover, low duration funds actively manage duration to generate returns; hence, fund values are subject to volatility. Check the portfolio of the fund to analyze the securities in which the fund has invested. On average, you can expect low duration funds to offer returns anywhere between 6.5 and 8.5%.

 Expense Ratio

The expense ratio plays a vital role in determining your gains when investing in low duration funds. It is the fee the fund house charges towards fund management services. To maximize your profits, look for schemes with a lower expense ratio.


Low duration funds attract STCG if the holding period is less than three years and taxable as per the income tax slab applicable. When the holding period is over three years, LTCG is taxed at 20% with indexation benefits.

An investor becomes successful when his investment plans are genuinely based on his investment goals, risk preference, and investment horizon. Whether you will invest in low-duration funds for regular income or better returns on the idle funds lying in your savings account, you need to match your goals. Consult your financial advisor for better guidelines.

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