Short-Duration Funds: Meaning, Best Schemes, Risks & Returns

Many investors may find it confusing to distinguish between different categories of debt mutual funds. For example, short-duration funds are sometimes mistaken for low-duration funds.

In this article, we will discuss short-duration funds, their advantages, risks and returns & how they differ from low-duration funds. Keep reading!

What Are Short-Duration Funds?

A short-duration fund is a subcategory of debt mutual funds that invest in debt securities so that the average maturity period of the fund is between one to three years.

Objective- As the name suggests, short-duration funds focus on maintaining a relatively brief investment horizon, typically ranging from 1 to 3 years.

How do short-duration funds work? The fund manager of a short-duration fund wisely selects reliable debt securities or fixed-income securities ensuring the maturity period of the portfolio falls within the range of one to three years.

Once the portfolio of fixed-income securities is composed, the fund manager pools money from investors and invests in it.

Best Performing Short-Duration Funds

Here are some of the best-performing short-duration funds, based on past performances. This list does not offer investment advice. Investors must consider other crucial factors before choosing a mutual fund.

Fund Name1-Year CAGR3-Year CAGR
Kotak Bond Fund Short-Term Plan6.90%5.21%
Bandhan Bond Fund Short-Term Plan6.26%4.73%
DSP Short Term Fund6.56%4.86%
Nippon India Short Term Fund6.95%5.74%
Axis Short-Term Fund6.94%5.44%
Last Updated: August 2023

Short Duration Vs Low Duration Funds

Short-duration funds and low-duration funds are sometimes mistaken for each other. The difference between the two is their investment strategy.

Short-duration funds focus on investing in debt securities to achieve an average maturity of 1 to three years.

On the other hand, low-duration funds focus on investing in debt securities so that the portfolio’s maturity ranges from 6 to 12 months.

Advantages Of Short-Duration Funds

  1. Short-term funds offer somewhat similar returns to fixed deposits without compromising on liquidity
  2. These funds are good choices for short-term goals like purchasing a car, a child’s education etc.
  3. Most short-duration funds do not have a lock-in period & don’t charge exit loads
  4. These funds charge a minimal expense ratio as these funds do not have to buy & sell securities very frequently.

Risks & Returns

Risks- As a debt mutual fund, short-duration funds carry three chief risks with them. These are interest rate risk, credit risk and liquidity risk.

  1. Interest Rate Risk- This refers to fluctuations in the interest rates paid by the underlying securities.
  2. Credit Risk- The likelihood of default by an issuer of debt securities.
  3. Liquidity Risk– This involves a situation in which an investor is unable to access their funds.

Returns- The average annual returns a short-duration fund may offer ranges from 5 to 8%.


Investors can make wise decisions that aid in saving and earning additional returns. One important factor to keep in mind is the expense ratio, which is deducted from the fund’s returns.

A higher expense ratio can notably diminish the overall gains obtained from the fund. Additionally, it’s crucial to be vigilant about any additional charges associated with the fund.


  1. What is a lock-in period?

    A lock-in period refers to a specific duration during which investments or assets cannot be withdrawn, redeemed or sold.

  2. What is an Expense ratio & exit load?

    The management cost of a mutual fund is called an expense ratio, while an exit load represents a predetermined charge applicable when investors exit the mutual fund.

  3. Can I do SIPs in short-duration funds?

    Yes, investors can systemize their investments by choosing a SIP investment mode.

  4. How to invest in short-duration funds?

    Here are the steps to invest in short-duration funds
    1. Open an investment account with a reputed AMC or an online investment platform
    2. Complete your KYC
    3. Research and select a short-duration fund
    4. Decide your investment amount & mode of investment
    5. Make the payment

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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