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What are low-duration funds?

As the name suggests, low-duration funds invest in securities that have a very short duration, generally of 6 to 12 months. Thus, these funds have a lower maturity period than short, medium, and long-duration funds. Low-duration mutual funds are debt funds that are designed to meet the needs of investors who have a short investment horizon. Investors looking for an even shorter maturity can opt for overnight funds and liquid funds.

Why invest?

Low-duration mutual funds invest in short-term securities where the volatility can be maintained better. Therefore, these funds are considered to be moderately risky only. If the interest rate falls after you invest in a low-duration SIP, you continue to earn the higher rate of interest against your scheme investments. If the interest rate rises, the fund can shorten the investment tenure and invest in new securities at a higher rate of interest.

The rate of return in low-duration mutual funds is usually higher than that of liquid funds and other ultra-short duration funds. They have a longer duration exposure enabling them to make more capital gains. The combination of low risk and decent returns makes them a good short-term fund option.

Who should invest?

Low-duration funds offer an alternative to low-risk bank deposits. For moderate risk, low-duration mutual funds offer higher returns and also better liquidity. Investors looking for a regular income through interest and capital gain can invest a portion in a low-duration SIP. It is suited for people with an investment horizon of three months or more. They can increase their risk moderately, compared to the likes of overnight funds, and earn a higher rate in return. It is also a good platform to save your surplus funds for the time being. If you have received a lump sum now but plan to use it six months from now, low-duration funds can be a good investment option.

What to consider?

One aspect worth considering is the exposure to low-quality debt. The debt portfolio of the fund and its rating must be tracked by the investor. Any default risk can lower the fund value and result in loss to the investor.

As mentioned, these funds are moderately risky. It is the volatility of the fund value that increases risk. Low-duration funds are actively managed to generate higher returns, which may add to the fund volatility.


The dividend earned on low-duration mutual funds is not taxable. However, the capital gain on the sale or redemption of the fund is taxable as per the period of holding. If held for less than three years, it will be taxed as per the investor’s income slab. If held for more than three years, a long-term capital gains tax will be charged at 20% with indexation benefits.


Find out more about low-duration funds on the Tata Capital Moneyfy app. With your Moneyfy app, you can invest in low duration funds and enjoy a steady short-term income.

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