Best Low duration funds are open-ended debt schemes that put money in short-term debt securities. The duration of the fund portfolio is around 6-12 months. Low duration funds have assets of longer duration as compared to liquid funds.

1. Introduction to Low Duration Funds

Low duration funds as the name suggests, invest in debt instruments with Macaulay duration between 6-12 months. The fund aims to give a better return in the short term as compared to liquid funds.

It takes a call on interest rate movements in the short run to generate a return for the investors. Low duration funds put money in low duration fixed income instruments to offer liquidity and return at moderate risk.

2. Top 10 Low Duration Funds

The table below shows the top-performing low duration funds based on 3-year and 5-year returns:

 

Fund

3-Year Returns

5-Year Returns

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Kotak Low Duration Fund- Standard Plan-Growth Option

7.84%

8.05%

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DSP Low Duration Fund – Regular Plan – Growth

7.55%

7.63%

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Aditya Birla Sun Life Low Duration Regular Plan Growth

7.65%

7.63%

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SBI Magnum Low Duration Fund Regular Plan Growth

7.53%

7.57%

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HDFC Low Duration Regular Plan Growth

7.38%

7.50%

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Nippon India Low Duration Fund Growth

7.17%

7.41%

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L&T Low Duration Fund Growth

6.14%

7.37%

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Edelweiss Low Duration Fund Regular Plan Growth Option

 

2.50%

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3. Who Should Invest in Low Duration Funds?

You may consider low duration funds if you seek a higher return as compared to liquid funds. Investors with a time horizon of 3-12 months put money in low duration funds. You could invest in low duration funds to achieve short-term financial goals such as funding a vacation or parking funds for short-term needs.

Investors who could accept moderate risk for regular income may consider investing in low duration funds. Low duration funds generate a return through a combination of interest earnings and capital gains. It may hold assets in low-rated bonds to boost interest income. You may consider your financial goals before investing in low duration funds.

You could diversify your portfolio with low duration funds for a steady return. It is a liquid investment and is suitable for a time horizon which is greater as compared to both, liquid funds and ultra-short debt funds. The return from low duration funds may be higher as compared to bank fixed deposits. It could do well in a falling interest rate scenario.

4. Taxability of Low Duration Funds

Low duration funds are taxed in a similar manner as debt funds. The short-term capital gains after holding the fund for less than three years are taxed depending on your income tax bracket.

The long-term capital gains (after holding for a period which is three years or more) are taxed at 20% with the indexation benefit. The indexation benefit helps you to increase the purchase price of the low duration fund to adjust for inflation.

The dividends offered by low duration funds are added to your taxable income. You would have to pay tax on dividends depending on your income tax bracket. It helps investors in the lower income tax bracket get a tax-efficient income.

5. Risks Associated With Low Duration Funds

Low duration funds are subject to credit risk. It may invest in lower-quality debt instruments (lower-rated paper), where the chance of default is higher as compared to liquid funds. The lower-rated paper has reduced liquidity and cannot be redeemed at a fair valuation. It may become even more challenging to sell lower-rated paper during periods of tight liquidity.

Low duration funds have a moderate level of interest rate risk. It is the chance of a loss resulting from the change in the interest rate. Low duration funds have a lower duration and are less affected by interest rate risk as compared to long-term debt funds. However, the interest rate risk exists in all debt funds. Low duration funds are subject to some volatility in interest rates.

6. Things to Consider Before Investing in Low Duration Funds

  • Risk profile: Low duration funds are affected by interest rate risk and credit risk. You may track the Macaulay duration of the low duration fund to determine the interest rate risk. You may consider checking the portfolio of the low duration fund to determine if its assets are in low-quality debt paper. It could increase the chances of a default making it unsuitable for your risk appetite.
  • Return: You may consider checking the performance of the low duration fund over six months to one year. You could pick a fund that consistently beats the benchmark and its peers over some time. Check the track record of the fund, asset management company (AMC), and the investment style of the fund manager, before investing your money.
  • Expense Ratio: The expense ratio is the total cost of managing the fund. You may consider picking a fund with a lower expense ratio to increase your return. You could keep track of the expense ratio as it impacts your final return.
  • Check the fund fact sheet: You may consider taking a look at the fund fact sheet of the low duration fund. You get an idea of the details of the portfolio and the rating of the debt security. You could check for excessive exposure to a single bond or a high exposure to lower-rated bonds.

7. Advantages of Investing in Low Duration Funds

The following are a few benefits of investing in low duration funds:

  • Low duration funds may offer regular income through a combination of capital gains and interest earnings.
  • You may consider low duration funds to achieve short-term financial goals.
  • They may offer a higher return as compared to bank fixed deposits.

  • You could hold money in the low duration fund while using the systematic transfer plan (STP), to transfer investments into an equity or hybrid fund.
  • You may find low duration funds offering a higher return as compared to liquid funds.

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