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Mastering the art of investing with low-duration funds

When we speak about investing, there’s a star player that often goes unnoticed – the low-duration fund. It’s not as flashy as some of its counterparts, but what it lacks in glamour, it makes up for in consistency and reliability. 

For those who prefer a steady journey over a volatile ride, low-duration funds can be a perfect match. They offer a unique blend of potential returns and lower risk, making them a worthy contender in your investment portfolio.

The article delves into the nuances of low-duration bonds.

What is the low-duration fund?

Among the many varieties of debt funds, one is a low-duration mutual fund. SEBI’s standards for rationalisation and categorisation outline 16 distinct forms of debt. The decision-making process can be simplified even for someone new to investing with the help of these groups. They have been classified based on their approach and duration.

The goal of low-duration funds is to maintain a Macaulay Duration of 6 to 12 months by investing in debt securities and money market instruments. Macaulay Duration is the weighted average of the present value of each bond payment and the average time it takes for an investor to receive full payment. 

Let’s look at an example to understand Macaulay’s Duration:

Suppose you invest in a bond that pays you ₹50 at the end of each year for 2 years and returns the principal amount of ₹1000 at the end of the 2nd year.

YearCash flowWeight of cash flow
Total₹11001.954 years

So, 1.954 years is this bond’s Macaulay Duration. Thus, to receive the entire present value of this bond, it needs to be held for the time duration of 1.954 years.

Here is a list of a few of the available low-duration debt funds currently available for investment and their respective returns:

1 Yr returnExpense ratioNet assets (₹ crore)
Aditya Birla Sun Life Low Duration Fund – Direct Plan7.710.3910,748
Axis Treasury Advantage Fund – Direct Plan7.550.295,101
Bandhan Low Duration Fund – Direct Plan7.250.325,077
Baroda BNP Paribas Low Duration Fund – Direct Plan7.550.37195

For instance, the YTD returns of one such low-duration fund – Bandhan Low Duration Fund – Direct Plan is shown in the chart below. The CCIL T Bill index stands for the yield on government-issued treasury notes, which are instruments with short maturity. The debt: low-duration represents the average market performance of low-duration funds.

Investors can assess how well the fund is performing in comparison to other comparable investment options by comparing its performance to these indices.

comparison indices

Benefits and risks

Low-duration mutual funds are a beneficial alternative to savings accounts, offering a platform for depositing funds and earning higher returns.

Low-duration funds outperform bank savings and liquid funds. Low volatility gives these funds a steady return edge. Their stability makes them better than volatile equities funds. 

Low-duration funds, like all investments, also have risks. Due to the possibility of issuer default, their credit risk is larger than that of liquid funds.

Low-duration funds may be more susceptible to changes in interest rates. Low-duration funds are less affected by interest rate fluctuations compared to other debt instruments because of their shorter maturity period. It’s important to highlight that the interest rate risk in low-duration funds remains lower compared to long-term debt funds.

How do low-duration funds work?

Debt instruments having maturities of six to twelve months are the main emphasis of low-duration funds. When compared to other debt funds, these have a slightly longer lending period because they mostly lend to businesses for shorter periods. 

Securities with maturities of one year or less, including corporate bonds and fixed-income instruments, make up the fund’s debt and money market instruments portfolio. Funds with a short investment horizon aim to earn money by collecting interest and capital gains on debt instruments. 

Investors looking for stability and liquidity, while aiming to optimise returns within a shorter timeframe, may find them to be a suitable option.

Difference between liquid fund and low duration fund

Liquid fundLow duration fund
MeaningThe majority of a liquid fund’s holdings will be in debt instruments with maturities of less than ninety-one days.Debt funds that typically invest in debt instruments with maturities ranging from six months to twelve months are known as low-duration funds.
Risk profileLiquid funds are thought to have the lowest level of risk when compared to debt funds.Interest rate and credit risk are higher for funds with a short maturity than for funds with a longer maturity.
Investment instrumentsTreasuries bills, commercial paper, CDs, and other short-term financial instruments with maturities of ninety-one days or less are common investments.There are no limitations on the kind or quality of debt assets that low-duration funds can invest in. Securities such as money market funds, bonds (both corporate and government-issued), securitized debt, real estate investment trusts (REITs), derivatives, and other mutual fund units fall under this category.


Low-duration funds are a unique investment avenue that offers a blend of potential returns and lower risk. 

Investing in low-duration funds can be a strategic move for those looking for consistent returns and stability in their investment portfolio. Investors should carefully evaluate their risk tolerance and financial objectives before pursuing this investment opportunity. 


What is the difference between short-term and low-duration?

Short-term funds invest in securities with maturities of up to 3 years, providing moderate returns with low risk. They’re suitable for investment horizons of 1-3 years. On the other hand, low-duration funds invest in instruments with maturities of up to 1 year. They offer lower returns but also lower risk, making them ideal for investment horizons of 6-12 months. Both are types of debt mutual funds.

What is the difference between high-duration and low-duration stocks?

The term “duration” is typically used in the context of bonds, not stocks. It refers to the sensitivity of a bond’s price to changes in interest rates. However, if we apply it to stocks, “high duration” could refer to stocks that are more sensitive to overall market changes, while “low duration” could refer to less sensitive stocks. It’s important to consult with a financial advisor for accurate information.

Are short-duration funds safe?

Short-duration funds invest in debt securities with shorter maturities, typically up to 1 year. They are considered relatively safe as they are less exposed to interest rate risk compared to long-term debt funds. However, like all investments, they are not entirely risk-free. Credit risk, liquidity risk, and market risk can still affect the fund’s returns. Therefore, it’s important to assess your risk tolerance and investment goals before investing.

Is Liquid Fund better than FD?

Liquid funds and Fixed Deposits (FDs) serve different investment needs. Liquid funds offer flexibility with no lock-in period and the potential for higher returns, but they carry market risks. FDs provide guaranteed returns and are safer, but they have a fixed tenure and premature withdrawal can result in penalties. The choice between liquid funds and FDs depends on your risk appetite, investment horizon, and liquidity needs.

Why FD is better than stocks?

Fixed Deposits (FDs) and stocks serve different investment needs. FDs are considered safer as they provide guaranteed returns and are not subject to market volatility. They are ideal for conservative investors seeking stable income. On the other hand, stocks have the potential for higher returns but come with higher risk and volatility. The choice between FDs and stocks depends on your risk tolerance, investment horizon, and financial goals.

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