Low Duration Funds

Low Duration Mutual Funds are one of the Debt funds. Debt can be categorized into 16 types as per SEBI's rationalization and categorization norms. These categories were created to simplify choices, even for the new investor. This categorization has been done based on strategy and duration.

Based on duration, debt funds are classified as overnight funds, liquid funds, ultra-short duration funds, low-duration funds, short-duration funds, medium-duration funds, medium to long-duration funds, and long-duration funds.

Here, we will explore Low Duration Funds and discuss various factors that you need to consider before investing in them.

List of Low Duration Mutual Funds

• Aditya Birla Sun Life Low Duration Fund Direct Growth
• HDFC Low Duration Fund Direct Plan Growth
• Sundaram Low Duration Fund Direct Growth
• SBI Magnum Low Duration Fund Direct Plan Growth
• LIC MF Low Duration Fund Direct Growth
• UTI Low Duration Fund Direct Growth
• Tata Treasury Advantage Direct Plan Growth
• ICICI Prudential Savings Fund Direct Plan Growth
• Kotak Low Duration Fund Direct Growth
• Nippon India Low Duration Fund Direct Growth

What is Low Duration Mutual Funds?

Low Duration Funds invest in money market instruments and debt securities so that the Macaulay Duration of the fund is between six and twelve months. These funds are ideally suited to low-risk investors with a one-year investment horizon. 

Low-duration funds have a higher maturity than liquid funds and overnight funds but lower maturity than short, medium, and long-duration funds. These funds allow investors to park their money for 6-12 months and earn returns better than a regular savings account. The average returns of these funds range between 6.5% and 8.5%. 

Features of Low-Duration Funds 

The main characteristics of these low-duration funds are as follows:

• It is possible for the fund to be open-ended or closed-ended. Investors can enter and quit open-ended funds anytime until the fund matures.
• These funds are suited for investors who seek a consistent source of income from their investment, in addition to those with a shorter investment horizon and a reduced risk profile.
• Shorter-term funds will be more liquid than longer-duration funds.
• These funds typically charge reduced management fees.
• Low duration mutual funds do not necessitate ongoing fund management. The requirement for active management is substantially reduced once the instruments to be invested in are chosen based on value, income flows, and credit quality.

How Does a Low-Duration Mutual Fund Work

The fund manager of a low-duration fund selects debt securities and money market instruments according to the investment objective of the fund, ensuring that the Macaulay duration is between 6 and 12 months.

How Should You Invest in Low Duration Mutual Funds

You can invest in a low-duration fund through an intermediary or an asset management company. One such reliable source is Groww. All that you would have to do is visit the App Store or Play Store, download the application, sign up, complete the KYC, and start investing.

Why Should You Invest in a Low-Duration Fund?

The main benefits of investing in low-duration funds are:

Moderate Risks

Such funds have a moderate level of interest rate risk because they typically do not hold securities with maturities of more than 11.5 years.

Higher Returns

Low-duration funds typically outperform liquid funds because they can take on more credit and duration risk. These funds may also outperform ultra-short-duration funds since they can earn bigger capital gains by holding longer-maturity bonds.

Taxation Rules of Low-Duration Mutual Funds

Being a debt fund, the taxation rules for a low-duration fund are as follows:

Capital Gains Tax

Before looking at the tax rates, here is a quick understanding of the ‘holding period.'

The Holding Period is the amount of time an investor holds the security. In other words, it is the time between buying and redeeming the units of the fund.

If the holding period is less than three years, then the gains you earn are termed Short Term Capital Gains or STCG. For low duration mutual funds, STCG is added to your taxable income and taxed according to the applicable income tax slab.

If the holding period is more than three years, then the gains earned by you are termed long-term capital gains or LTCG. For low-duration funds, LTCG is taxed at 20% with indexation benefits.

FAQs

Q1. What is a low-duration fund?

A debt fund that invests in short-tenure debt securities and money market instruments is known as a low-duration fund. The fund portfolio has a duration of 6 to 12 months. 

Q2. How does a low-duration fund work?

Low Duration Funds are loan funds that lend to businesses for 6 to 12 months. They are slightly more volatile than liquid or ultra-short duration funds due to their longer lending duration, but they do not include any stock market or equity instruments and thus are generally safer funds to invest in.

Q3. Who can invest in a low-duration fund?

Short-duration funds are often suitable for investors prepared to commit to at least one year of investment; however, a horizon of 1-3 years may be preferable for the highest results.

Q4. Are low-duration funds risky?

Low-duration funds are debt funds that are among the lowest-risk funds in the duration fund family. They have a low amount of interest rate risk, which is the danger of losing money due to a change in interest rates. 

Q5. What is the major benefit of investing in low-duration funds?

One of the significant benefits of mutual funds is risk diversification. Every stock faces three kinds of risk: company risk, sector risk, and market risk.

Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.