In India, there are numerous investment options available to mutual fund investors, including equity, debt, hybrid, and more. One such category of funds that has gained traction in recent years is low duration mutual funds. These funds invest in debt securities with shorter maturity periods, making them a lower-risk investment option compared to other mutual fund categories.
“Know what you own, and know why you own it.” – Peter Lynch.
When it comes to investing in mutual funds, especially low duration funds that invest in debt securities with a shorter maturity period, it’s important to understand what you’re investing in and why.
In this blog, we’ll take a closer look at the top-performing low duration funds in India, their characteristics, and how they can potentially help you achieve your investment goals with lower risk. So, let’s dive in and get to know these funds better!
What are low duration funds and how do they work?
The debt funds are further classified into various categories depending on the duration of the fund. Among these categories, low duration funds are the funds that invest in short-term debt securities with a maturity of 6-12 months. These funds have relatively lower interest rate risk on account of shorter duration. The type of securities invested under low duration funds are,
- Government securities and bonds
- Money market securities
- Securitized debts
- Corporate bonds
- REITs
- Permitted derivatives
- Other eligible mutual fund units
These funds generate income through the interest on these securities and through capital gains. The investment in AA rated securities or lower will generate a higher rate of interest as compared to lower rated bonds but the latter have a higher risk of default. The capital gains in low duration funds can be increased by investing more in longer duration funds.
This is a standard strategy applied by fund managers as it helps them in pushing the value of the fund on a higher side.
Who are the target investors for low duration funds?
The low duration funds are ideal for investors looking for short term investment options. These funds provide higher returns at manageable risks. These funds provide a better investment option in comparison to traditional investment options like bank savings or recurring deposits for the same duration. Investors can simply park their money in the low duration funds and earn returns.
What are the pros and cons of low duration funds?
Like any investment, an investment in low duration funds has its own set of pros and cons. Given below are a few benefits and risks involved in investment towards low duration funds that can help investors make better investment decisions.
- Pros
Some of the benefits of investing in low duration funds are,
- They come across as a good replacement for parking funds usually parked in savings bank accounts to earn higher rates of interest.
- Short term funds are less volatile and hence the returns are consistent.
- These funds offer higher returns as compared to liquid funds as well as traditional investment options like bank deposits or savings accounts.
- These funds can be used eventually to transfer funds to a long term equity fund or hybrid funds through a systematic transfer plan
- Many funds do not charge exit load on low duration funds.
- Cons
Some of the risks of investing in low duration funds are,
- Credit risk
Credit risk is one of the major risks that is faced under low duration funds. The credit risk is the risk of default which is higher in comparison to liquid funds.
- Interest risk
Another important risk factor is the interest rate risk. This is the risk of change in the interest rate which exists in all types of debt instruments but is relatively less in the case of low duration funds. As these funds have a lower duration so the interest rate risk is quite low as compared to long-term debt instruments.
How are low duration funds taxed?
Low-duration funds are a type of debt fund. Hence, the taxation of these funds is in line with that of debt funds. The low duration funds are subject to short term gains for investments held for a period of less than 3 years. The long term capitals are taxed for investments held for more than 3 years.
Short term gains are taxed at the applicable income tax slab rates whereas the long term capital gains are taxed at the rate of 20% with the benefit of indexation.
What are the things to be considered while investing in low duration funds?
There are several factors that have to be considered while making an investment in low duration funds. Some of such factors are mentioned below.
- Returns
The returns of the low duration funds are more or less consistent and are not subject to high volatility. Investors have to look for funds that have performed consistently in the time duration for the low duration funds. The returns of the fund will also reflect the fund manager style and the ability to manage the inherent risks of the fund.
- Risk
Low duration funds are subject to interest risks and credit risks that are part of every debt fund. Investors have to look out for funds that have limited exposure to low rated debt instruments. This will limit the risk involved for the investors.
- Investment goals
The low duration is one of the top investment options for investors with short term financial goals. However, it is also important to note that parking emergency funds in low duration are quite risky.
- Investment horizon
The investors having an investment horizon of approximately 6 months to 12 months can invest in the low duration funds. The investment horizon will be in line with the maturity of the funds which will help them gain maximum returns.
- Expense ratio
The expense ratio is the cost to be paid by the investors for managing the fund. Investors have to opt for funds that have a lower expense ratio so the returns can be maximized. It is, therefore, necessary to track the funds to ensure that the investor selects funds that have a lower expense ratio and higher returns.
Top low duration funds
The top funds under this category and a few details of these funds are mentioned below.
IDFC low duration fund is a low duration fund with investment in debt instruments having a maturity of 6 months to a year. This is an open-ended fund and launched in 2006. The fund is a low-risk fund and the details of this fund are mentioned below.
| Particulars | Details |
| Fund manager | Harshal Joshi |
| Launch date | January 01, 2013 |
| Minimum investment | Rs. 100 |
| Expense ratio | 0.30% |
| Risk | Low to Moderate risk |
The returns provided by the fund as of 29th December 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 1.82% | 3.68% | 6.43% | 6.80% | 7.86% |
- Axis Treasury Advantage Fund
This is an open-ended low duration fund launched in the year 2013. The fund is categorized under below average risk grade. Some details of the funds are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Devang Shah and Mr, Aditya Pagaria |
| Launch date | 1st January 2013 |
| Minimum investment | Rs. 5,000 |
| Expense ratio | 0.30% |
| Risk | Moderate |
The returns provided by the fund as of 29th December 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 2.00% | 4.05% | 6.93% | 7.18% | 8.03% |
- SBI Magnum Low Duration Fund
This fund is from the SBI Mutual Fund house and was launched in 2013. The fund is available in the direct plan and regular plan. The details of the direct plan of this fund are mentioned below.
| Particulars | Details |
| Fund manager | Mr. Rajiv Radhakrishnan |
| Launch date | 1st January 2013 |
| Minimum investment | Rs. 5,000 |
| Expense ratio | 0.40% |
| Risk | Moderate |
The returns provided by the fund as of 29th December 2021 are tabled below
| Period | 6 months | 1 yr | 3 yrs | 5 yrs | Since launch |
| Returns | 1.90% | 3.72% | 6.58% | 6.80% | 7.71% |
Conclusion
Low duration funds are among the many types of debt funds available for investors. Investors can invest in growth plans or direct plans depending on their preference and other factors like expense ratio, investor knowledge and experience, as well as returns expectations. The low duration funds make a good investment option in the portfolio making a healthy mix of short term and long term funds.
FAQs
1. What is the exit load on low duration funds?
A. The levy of exit load on the low duration funds is subject to many conditions or the rules and regulations of any fund house. It is, therefore, necessary to check the guidelines for exit load before investing in a fund.
2. Is there a lock-in period in low duration funds?
A. No. Unlike ELSS funds, the concept of lock-in period is not present in low duration funds.
3. What is the duration of the investments under low duration funds?
A. The duration of the investments under low duration funds is from 6 months to 12 months.
4. What is the maximum expense ratio that is levied on low duration funds?
A. The maximum expense ratio that is levied on low duration funds is 1.05% as per the regulations of SEBI.
