Low Duration Funds: Comprehensive Overview + FAQs

SEBI (Security Exchange Board of India) has categorised debt mutual funds into various categories, each with defined characteristics. It enables investors to choose a mutual fund according to specific needs easily.

Low-duration funds are a sub-category of debt mutual funds. This article offers a comprehensive overview of “low-duration mutual funds” to help you determine if these funds match your needs.

What Are Low Duration Funds?

Low-duration funds are debt-oriented mutual funds that invest in debt securities and money market instruments to achieve an average maturity period (Macaulay Duration) between 6 to 12 months.

What Debt Securities Does A Low Duration Fund Invest In? A low-duration mutual fund invests in money market instruments such as T-Bills, Commercial Papers, Government securities and other debt securities with a maturity period of six to twelve months.

The fund manager selects reliable debt securities while considering their respective credit ratings & composes a basket of investments. Aspiring investors then place their money into this basket.

Best Performing Low Duration Funds

Based on past performance, here is a short list of low-duration funds. This list does not contain any recommendations or investment advice.

Fund Name1-Year CAGR3-Year CAGR
HDFC Low Duration Fund7.45%5.62%
Kotak Low Duration Fund7.34%5.45%
Aditya BSL Low Duration Fund7.25%5.61%
Nippon India Low Duration Fund6.96%5.63%
UTI – Treasury Advantage Fund6.77%6.71%
Last Updated: August 2023

Advantages Of Low-Duration Funds

Let’s have a look at the advantages that low-duration funds offer to their investors.

a – Low Risk

Usually, debt mutual funds carry a lower risk than equity funds. Surprisingly, low-duration funds carry even lower risks than certain debt mutual funds such as credit risk funds.

B- Meaningful Returns

Low-duration funds produce meaningful returns if you are comfortable with a slight risk. These funds offer significantly higher returns compared to traditional bank accounts. The average annual returns of low-duration funds may typically fall within the range of 5-8%.

C – Good Choice For Short Term Goals

These funds are tailored keeping in mind short-term investment goals & low-risk appetite. Hence, these funds are a good choice for short-term goals, such as funding a vacation or building an emergency fund.

Associated Risks

Even though these funds are considered low-risk investments, understanding the associated risks is compulsory.

#1. Interest Rate Risk

These funds are sensitive to fluctuations in interest rates. A tiny increase or decrease in the interest rates can significantly impact the value of the fund.

#2. Credit Risk

Even though these funds invest in relatively safer short-term securities, there is still a risk that some issuers may default on their payments.

#3. Liquidity Risk

While low-duration funds offer better liquidity than some other funds, they may lack liquidity in certain conditions such as during times of market stress.

Things To Consider While Investing

Given that Long-duration funds generate lower returns than equity mutual funds. A wise strategy may help you earn additional pennies. First, be aware of the expense ratio as it may eat up your returns and affect your net gains.

Secondly, take into account other potential charges, including exit loads. While many Low-duration funds do not impose exit loads, verifying this before making your investment is crucial.


  1. How to invest in Low-duration funds?

    A. Register with any reputed online investment platform
    B. Open an account & complete KYC
    C. Select a low Duration Fund
    D. Choose the mode of investment i.e. lumpsum or SIP Investment
    E. Make the payment

  2. Who should invest in Low-duration funds?

    As a general rule, low-duration mutual funds are good for investors with:
    1. Short-term investment horizon
    2. Low-risk tolerance
    3. Diversification needs

  3. Can I Do SIP In A Low Duration Fund?

    Yes, investors can choose to systematically invest in these funds using the SIP investment mode.

  4. Can I Withdraw Money From Low Duration Funds Anytime?

    Yes, these funds offer a good level of liquidity to investors. Hence, you can withdraw money from Low-duration funds anytime.

  5. How Are Low Duration Debt Funds Taxed?

    As per recent changes in taxation rules for debt mutual funds, these funds are now subject to taxation according to the applicable Income Tax slab rates.

A commerce graduate turned a digital creator to follow his passion for writing and sharing useful & well-researched information that adds some value to people's lives.

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