Short Duration Funds: Stable Debt Fund Investment

What is a Short Duration Fund?

A Short Duration Fund is a type of debt mutual fund that invests in short-term debt instruments. The Macaulay duration of the fund ranges between 1 and 3 years.

Advantages of Short Duration Funds

Low volatility risks

Being debt-oriented, short duration funds have low volatility risks and offer stable returns on your investment.

Short-term investment

Short duration funds are suitable for investors with an investment horizon of 1 to 3 years who want stable growth.

Stable returns

Short duration funds offer stable returns on your investment ranging from 5% to 8%.

High Liquidity

Typically offer good liquidity, allowing investors relatively easy access to their funds within a short to medium timeframe.

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Understanding Short Duration Funds

Table of Contents

What are short duration funds?What are the features of short duration mutual funds?Things to keep in mind when investing in short duration funds What should be the investment horizon for short duration funds?What is the tax implication of short duration funds?What are the payout options?

What are short duration funds?

A type of open-ended debt mutual fund , short duration funds are those that invest in debt and money market securities in such a manner that the Macaulay portfolio duration lies between 1 and 3 years, making it suitable for short to medium-term investors.

What are the features of short duration mutual funds?

Offers stable returns on investment
Low volatility risk since the fund primarily invests in debt and money market securities
There’s no capping on the maximum investment amount
Returns from these funds range in the 5% to 8% limit
You can get better returns compared to fixed deposits while minimising investment risks

Things to keep in mind when investing in short duration funds

These funds face some extent of credit risk as their values eroded in recent times when the NBFC crisis happened

Check the expense ratio of such schemes. A high ratio eats into the fund’s returns and should be avoided

Compare short duration funds on their returns. A fund with the highest return is better

These funds face interest rate risks since they invest in long-term debt securities, too, which might fall in value if interest rates are cut.

What should be the investment horizon for short duration funds?

Short duration funds invest in both short and long-term securities. However, exposure to long-term securities is low
They are suitable for investors with a low to medium investment horizon
If you want to invest for more than a year but up to 2-3 years, these funds would be a good choice

What is the tax implication of short duration funds?

Returns earned are taxed at your income tax slab rates
Dividends earned, if any, are taxed at your income tax slab rates

What are the payout options?

Dividend option

Earn dividends on your investment at regular intervals
Growth option

Accumulate the returns over the investment tenure and get a lump sum amount on redemption

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FAQs On Short Duration Funds

Short duration funds invest in debt securities and money market instruments.

Short duration funds are known as one of the safest investment choices. However, you must be aware of the market risks before investing.

The minimum investment horizon for short duration funds is 1-3 years.

As per the Union Budget 2023, the gains on short duration funds are taxed as capital gains. They could be classified as LTCG (Long Term Capital Gains) or STCG (Short Term Capital Gains) depending on the investment period.

The minimum investment horizon for short duration funds is 1 year.