Short Duration Funds: Definition, Features & Benefits

Short duration funds can be defined as a type of mutual fund that primarily invests in debt and money market instruments so that the overall Macaulay Duration of the fund's portfolio is between one to three years.

This means that short duration funds are debt funds that are capable of creating a balance between risk and return. This make these mutual funds uniquely suited to the needs of investors with relatively low risk appetite who are seeking moderate growth with low volatility in the short to medium term. The relatively low volatility of these schemes stems from the short Macaulay Duration of 1 to 3 years of the fund portfolio.

Below are some key features of Short Duration Debt Funds that one needs to keep in mind:

• Investment Horizon: As the name suggests, short duration funds target a short to medium term investment period. So these investment plans are considered suitable for an investment period between one to three years.
• Low Interest Rate Sensitivity: These mutual funds feature potentially low interest rate sensitivity due to the relatively short portfolio Macaulay Duration of 1 to 3 year.
• Return Potential: Short duration funds have the potential to provide modest yet stable returns with low volatility, this makes them suitable for achieving short-term financial goals.
• Liquidity: One attractive feature is the relative ease of buying and selling, providing investors with a reasonable level of liquidity. This makes short duration fund suitable option when one.
• Tax Implications: Like other debt mutual funds, short duration funds are subject to taxation. Currently both long-term and short-term gains from these schemes are as per the income tax slab of the investor for the applicable financial year.

Below are some key benefits of investing in short duration funds in India:

• Stability: Short duration funds are potentially less volatile as compared to many other types of mutual fund due to their low sensitivity to interest rate fluctuations.
• Flexibility: Short duration schemes are usually open-ended funds so one can invest in and redeem investments as and when required. Additionally, these debt schemes allow investors to make lumpsum investments as well as through systematic investment plans. This enhances the flexibility of these investments.
• Short term returns: Though not designed for aggressive growth, the consistency of these funds make it suitable for those investing for short-term goals.

Short duration funds follow a specific investment strategy with a typical approach:

• Asset Selection: These funds invest in fixed-income securities such as bonds, treasury bills, certificate of deposit (CD) and commercial papers with a maturity period of one to three years.
• Risk Management: Fund managers carefully assess the risk associated with each security, focusing on credit quality and interest rate sensitivity.
• Diversification: To reduce risk, short duration funds often diversify their across various sectors and industries.

Investing in short duration funds is easy. Here's a step-by-step guide:

• Identify Your Goals: Determine your investment horizon and risk tolerance.
• Choose the Right Fund: Select a short duration fund that aligns with your objectives.
• Open an Investment Account: This can be done through a financial advisor or an online platform.
• Monitor and Rebalance: Regularly review your investment and make adjustments as needed.

Below are some of the key reasons why investors may choose to invest in short duration funds:

Below are some key limitations of short duration funds in India that you need to keep in mind:

The following are some key criteria that you can use to choose a short duration fund that suits your investment needs: