What Is Short Duration Fund

Short-duration funds are debt-oriented mutual funds that restrict their investment portfolio to interest-income yielding instruments having short-term maturities. They typically lend money to corporates for a short period of 1-3 years. Short duration funds have come up as fairly attractive investment opportunities in recent times.Here’s an insight into the main features of short duration funds:

The SEBI has not created a separate category for short-term funds so technically, there is no standard definition for short duration funds. However, any mutual fund focusing on debt investments with a horizon of up to three years is considered as a short duration fund. Lower than that would be termed as a liquid fund or an ultra-short-term fund and schemes with a higher horizon would be a medium duration fund or a long duration fund.

Short duration funds offer better returns than conventional savings options like fixed deposits, savings account and recurring deposits. However, they are subject to various threats like market risk, interest rate risk and credit risk. Therefore, these returns are not assured but only estimated or anticipated. Investors may typically expect a variable yield of about 8 to 10%.

Short term funds boast of providing better liquidity and marketability to the invested funds. The conventional debt-oriented investment avenues may be time-honored but come with several restrictions like having a lock-in period, a penalty being imposed on early withdrawal, etc.
Schemes in the short duration mutual fund category are usually open-ended. A marginal exit load may or may not be levied on very early redemption of money, depending on the scheme’s guidelines. Regardless, these funds are viewed as offering better convertibility to cash and thus a great avenue to park funds for emergency and not just wealth creation.

Gains on debt mutual funds are considered as long term if the funds in a debt scheme are held for more than three years. Short duration funds, being a category of debt mutual fund, are taxed accordingly. Short-term capital gains on debt mutual funds are taxed as per the investor’s slab rate. But, in case of long-term capital gains, short-duration funds attract a flat tax rate of 20% along with indexation benefit.

Thus, it can be summarized that a short duration fund is a savings vehicle that pools money from investors and invests the accumulated corpus in money-market instruments and debt-market securities having short-term maturities.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.