Low duration mutual funds are a type of debt mutual fund that primarily invests in short-term fixed-income securities such as corporate bonds, government securities, treasury bills, and money market instruments with an average maturity of 6 to 12 months. These funds aim to provide moderate returns with lower interest rate risk compared to long-term debt funds, making them suitable for investors looking for short-term investment options with relatively higher safety than traditional savings accounts or fixed deposits.
Key Takeaways
- Low duration funds offer a balance between safety and returns for short-term goals.
- Holding over 3 years allows tax benefits with indexation.
- High liquidity can make them ideal for emergency funds or temporary surplus money.
How Low Duration Funds Work?
Low duration funds pool investors’ money to invest in a portfolio of short-term debt instruments. The fund manager selects securities with 6–12 months maturity, balancing yield and risk. The returns are generated through interest income from the bonds and gains/losses from price movements of the instruments. Since these instruments are short-term, the impact of interest rate fluctuations on the fund’s NAV is relatively small. Investors can invest through lump sum or systematic investment plans (SIP) and redeem their units at the prevailing NAV.
Benefits of Low Duration Mutual Funds
- Lower Interest Rate Risk: Since the maturity period is short, the impact of interest rate changes on the fund’s NAV is minimal, providing more stability to the investor’s portfolio.
- Liquidity: These funds are highly liquid and allow investors to redeem their units at the prevailing NAV, usually within 1–2 business days.
- Diversification: They invest across various short-term instruments, reducing the default risk associated with a single issuer.
- Professional Management: Managed by professional fund managers, these funds leverage expertise in debt markets to optimise returns while minimising risks.
Taxation on Low Duration Funds
If units are redeemed within 3 years, gains are considered short-term capital gains and taxed as per the investor’s income slab. For holdings over 3 years, long-term capital gains tax at 20% with indexation applies. Dividends are now taxed in the hands of the investor as per their income slab.
Suitability
Low duration funds can be suitable for short-term investors, conservative investors, building an emergency corpus, or temporary parking of surplus funds.
Conclusion
Low duration mutual funds are an effective short-term investment option, combining moderate returns, lower risk, and easy liquidity. They are suitable for investors seeking a safer alternative to savings accounts or long-term debt funds, while professional management ensures optimal returns. Understanding taxation, risk, and fund structure is essential for making informed investment decisions.