Best Short Duration Funds
About Short Duration Mutual Fund
Short Duration Funds are open-ended funds with a maturity period from 15 days to 91 days. The maturity period of these funds varies depending on the maturity period of the underlying instruments. A short-duration fund is a mutual fund that mainly invests in debt securities with relatively short maturities. Short duration funds are also known as short-term bond funds due to their investment in bonds.
The investment objective of these funds is to provide a higher level of income against ultra-short duration funds or money market funds. These funds also maintain a relatively low level of interest rate risk as compared to longer-term bond funds.The fund manager parks money into a mix of government and corporate bonds, treasury bills, and other money market instruments to generate regular income for investors.
How Short Duration Fund Works?
The fund manager of Short Duration Funds invests in short-term securities and focuses on interest rate sensitivity. The underlying assets are generally fixed-income securities with relatively short maturities ranging from 15 to 91 days.
Features of Short Duration Fund
- Lower Interest Rate Risk: In comparison to long-duration bond funds, short-duration funds are less vulnerable to changes in interest rates. Therefore, when interest rates increase, the prices of longer-term bonds typically decline more drastically than the prices of short-term bond funds.
- Potential for Higher Returns: Short-duration funds aim to provide some level of safety and liquidity, but they also offer higher returns than money market funds or ultra-short-duration funds. This makes them attractive to investors seeking a balance between safety and yield.
- Income Generation: The interest payments received from the underlying debt instruments are the main source of income for investors in short-duration funds. Periodic dividend payments are normally how this income is given to investors.
Advantages of Short Duration Fund
- Higher Yield Than Money Market Funds: Short-duration funds provide higher yields as compared to money market funds or savings accounts. As a result, these funds become an attractive option for investors seeking better returns on their holdings with limited risk.
- Lower Interest Rate Risk: Short-duration funds are less sensitive to changes in interest rates compared to longer-term bond funds. Their relatively shorter average maturity helps mitigate interest rate risk, making them a suitable choice when interest rates are expected to rise.
- Reduced Volatility: Short-duration funds possess lower price volatility than longer-duration bond funds. However, they are not completely immune to market fluctuations, but they offer a degree of stability that can be comforting to risk-averse investors.
Risks Involved in Short Duration Funds
- Interest Rate Risk: Short-duration funds are exposed to interest rate risk. However, these are less risky against longer-duration bond funds. If interest rates rise, the prices of existing bonds in the fund’s portfolio may fall, leading to capital losses for investors.
- Credit Risk: Short-duration funds invest in various debt securities, including corporate bonds and other fixed-income instruments. There is a risk that the issuers of these securities may default on their interest or principal payments.
- Liquidity Risk: Short-duration funds are generally considered liquid; there may be instances when certain bonds in the fund’s portfolio become less liquid, making it challenging for the fund manager to sell them at favourable prices.
Factors to Consider Before Investing in Short Duration Fund
- The investor should define investment goals and time horizons before investing. The investor should ask questions such as whether they are looking for short-term income, capital preservation, or a combination of both.
- Analyse your risk appetite and the potential for losses. Short-duration funds are relatively lower in risk compared to longer-term bond funds, but they are not entirely risk-free.
- The investors should understand the fund’s investment strategy and review the fund’s prospectus to learn about its holdings.
Who Should Invest in Short Duration Fund?
Short duration funds are a good option for numerous investors. However, they are particularly well-suited to investors with specific financial goals, risk tolerances, and investment horizons. The below describes types of investors who may consider investing in short-duration funds:
- Income-Oriented Investors: Short duration funds could be appealing to investors who desire consistent returns from their investments. These investments are appropriate for making money since they often offer better rates than savings accounts or money market funds.
- Risk-Averse Investors: Short-duration funds provide a balance between safety and possible profits if you are risk-conservative and wish to lessen the impact of interest rate volatility on your assets. They are less susceptible to interest rate risk than longer-term bond funds.
- Short- to Medium-Term Goals: Short duration funds may be an option for investors with short- to medium-term financial goals, such as saving for a child’s future education or a down payment on a home. These funds give investors a choice between generating profits and short-term capital preservation.
Taxability of Short Duration Funds
These funds may prove tax-efficient for investors in higher tax brackets as they typically generate income that qualifies for lower tax rates than ordinary income. However, the tax treatment of the short-duration fund is based on the type of gain generated by the investor.
- Short-Term Capital Gains (STCG): If you hold your short-duration fund units for up to 3 years, any gains you make from the sale of these units are considered short-term capital gains. STCG is taxed at your applicable income tax slab rate.
- Long-Term Capital Gains (LTCG): If you hold your short-duration fund for over 3 years, any gains are treated as long-term capital gains. LTCG on debt mutual funds are taxed at a rate of 20% after providing indexation benefits.
How to Invest in Short Duration Funds?
Investing in short-duration funds through your Angel One account is a streamlined process that involves a few simple steps:
Step 1: Begin by logging in to your Angel One account using your registered mobile number. After logging in, validate the OTP (One-Time Password) for security purposes, and then enter your MPIN to access your account.
Please note that if you don’t have a Demat account with Angel One, you can open one quickly by completing the KYC (Know Your Customer) procedure and submitting the necessary documents.
Step 2: Once you’ve successfully logged in, it’s time to choose the most suitable mutual fund based on your financial needs and risk profile. You can evaluate various funds by navigating to the mutual fund section on the Angel One app. During this stage, consider the following factors:
- Search for the specific fund you wish to invest in or take recommendations from funds listed by Angel One across different categories.
- Analyse the fund’s historical performance, tax implications, constituent sectors, and the stocks it comprises.
- Utilise the provided calculator to estimate potential returns.
- Assess the level of risk associated with the fund and compare it to your risk tolerance.
- Check the fund’s ratings assigned by reputable rating agencies, typically on a scale from 1 to 5.
- Take note of the fund’s expense ratio, which provides insight into the cost of investing in it.
Step 3: After finalising the fund(s) you want to invest in, navigate to your Angel One account’s Mutual Funds section and search for your chosen fund. Since investing in mutual funds often involves a long-term commitment, exercise caution when selecting the fund(s) you intend to invest in. During this stage, consider the following:
- Decide whether you want to invest a lump sum amount or set up a monthly Systematic Investment Plan (SIP).
- Enter the investment amount you are comfortable with and choose your preferred payment method. UPI is the recommended mode, but you can also opt for net banking.
- After placing your order, you can establish a mandate for hassle-free future instalments if you’ve chosen the SIP investment route.
Top 10 Short Duration Fund to Invest in Short Duration Fund
| Name | AUM (in ₹ Cr) | Minimum Investment (₹) | 3Y CAGR (%) | 5Y CAGR (%) |
| Bank of India Short-Term Income Fund | 95.53 | 1,000 | 11.62 | 3.98 |
| Franklin India ST Income Plan | 12.51 | 5,000 | 9.95 | 5.45 |
| UTI Short Duration Fund | 2,399.13 | 500 | 6.84 | 5.62 |
| ICICI Pru Short-Term Fund | 18,689.00 | 5,000 | 6.02 | 8.08 |
| Aditya Birla SL Short Term Fund | 6,033.00 | 1,000 | 5.58 | 7.71 |
|
6,141.44 |
100 |
5.53 |
7.56 |
|
| HDFC Short-Term Debt Fund | 12,399.59 | 100 | 5.26 | 7.49 |
| Axis Short-Term Fund | 7,448.79 | 1,000 | 5.20 | 7.53 |
| Baroda BNP Paribas Short Duration Fund | 228.92 | 500 | 5.09 | 6.84 |
| Kotak Bond Short-Term Fund | 13,240.58 | 100 | 4.97 | 7.43 |
Note: The above funds have been filtered on the basis of 3Y-CAGR.
Bank of India Short Term Income Fund
It is an open-ended short-term debt scheme investing in instruments with Macaulay duration of the portfolio between 1 year and 3 years. The scheme is exposed to moderate interest rate risk and moderate credit risk. The expense ratio of the scheme is 0.60%.
Franklin India ST Income Plan
The scheme has an objective to provide stable returns by investing in fixed-income instruments. It makes investments primarily in short-term corporate bonds with a focus on higher interest income. The expense ratio of the scheme is 0.04%.
UTI Short Duration Fund
The scheme is well-placed to capture yield movement at the shorter end of the curve by maintaining a portfolio duration of 3 to 6 months along with a high degree of liquidity. The expense ratio of the scheme is 0.32%.
ICICI Pru Short-Term Fund
The scheme has an objective to derive income from investments in a range of debt and money market instruments while maintaining the optimum balance of yield, safety and liquidity. The expense ratio of the scheme is 0.45%.
Aditya Birla SL Short Term Fund
It is an open-ended short-term debt programme that invests in securities with Macaulay durations of 1 to 3 years.
Nippon India Short-Term Fund
It is an open-ended short-term debt programme that invests in securities with Macaulay durations of 1 to 3 years.
HDFC Short-Term Debt Fund
HDFC Short-Term Debt scheme seeks to generate regular income through investment in debt securities and money market instruments. The expense ratio of the scheme is 0.34%.
Axis Short-Term Fund
The scheme has an objective to generate stable returns with a low-risk strategy while maintaining liquidity through a portfolio comprising debt and money market instruments. The expense ratio of the scheme is 0.35%.
Baroda BNP Paribas Short Duration Fund
It is an open-ended short-term debt programme that invests in securities with Macaulay durations of 1 to 3 years.
Kotak Bond Short-Term Fund
It is an open-ended short-term debt programme that invests in securities with Macaulay durations of 1 to 3 years. The expense ratio of the scheme is 0.36%.
Mutual Funds Calculators
Short Duration Funds FAQs
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