Low duration funds are a type of mutual fund in which the fund manager invests the corpus in short-term debt securities. These invest in debt instruments whose maturity ranges from 6 to 12 months. The low tenure fund invests in fixed income instruments and helps investors avoid market risks and reap the benefits of decent returns.
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Top 10 Low Duration Funds for 2022:
Here is a list of some low duration funds ranked on the basis of 3-year annualised returns as on June 24 2022:
| Fund Name | 3-Year Annualised Returns |
| JM Low Duration Growth Direct Plan | 8.35% |
| JM Low Duration Bonus Principal Units Growth Direct Plan | 8.31% |
| UTI Treasury Advantage Growth Direct Plan | 7.41% |
| Sundaram Low Duration Fund Direct Plan | 6.63% |
| Nippon India Low Duration Growth Direct Plan | 6.46% |
| Aditya Birla Sun Life Low Duration Growth Direct Plan | 6.44% |
| Kotak Low Duration Growth Direct Plan | 6.38% |
| DSP Low Duration Growth Direct Plan | 6.32% |
| BNP Paribas Low Duration Growth Direct Plan | 6.23% |
| HDFC Low Duration Growth Direct Plan | 6.21% |
The following sections will cover more about low-duration funds. Read on to know more about the same.
How Low Duration Funds Work?
To understand these funds, you must understand their duration, the underlying debt instruments, and earning sources.
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Duration or tenure of investment
Duration of any investment reflects changes in a fund’s value in response to movements in market-linked interest rates. The higher duration of any investment means that fund’s value is more volatile and thereby has higher market interest rate risks and vice versa.
In the case of low-duration debt funds, the investment tenure of securities (bonds and debentures) in which they are investing is 6-12 months. Hence, they come with a lower-interest rate risk than most other categories of debt mutual funds such as Credit Risk Mutual Fund.
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Underlying debt instruments
SEBI guidelines do not restrict the type of debt security in which low duration funds have to invest. There is also no restriction on the credit quality of securities in which funds may invest their money. Hence, fund houses may invest in various short-term debt securities according to their strategy and investment objective. Securities in which funds invest their money include government bonds, money market securities, corporate bonds, etc.
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Earnings
These low duration mutual funds invest their corpus in money market and debt securities. They generate returns via interest income and capital gains arising from these holdings. Fund managers invest a part of their corpus in securities having lower credit quality as they provide higher returns.
Apart from interest, these funds also have capital gains as their alternate source of earnings. Fund managers start investing their fresh inflows in debt securities, having a longer maturity when interest rates start falling. The gains arising from capital appreciation of long-term debt holdings cover any loss of interest income for the investors. Fund managers consider market interest rates and the credit profile of any bond before making an investment decision.
Who Can Invest in Low Maturity Debt Funds?
Here is a list of parameters that defines who must invest in these funds:
- Regular income
Historically Individuals seeking a regular income have been an ideal candidates for parking their money in this category of funds. Interest income and gains arising from capital appreciation of these debt holdings are two familiar sources of income for low-duration mutual funds.
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Alternative for bank deposits
Investors looking for an alternative investment option apart from bank deposits can go for investing in these funds. If an investor has a moderate risk capacity, these funds are more lucrative than most bank deposit.
Advantages of Low Duration Funds
The advantages of investing in these funds are as follows:
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Moderate risk
These funds come with moderate to low risk when compared to equity funds. Funds invest in debt securities having a maturity period of 6-12 months. When the interest rate falls, any loss of interest income from fresh bonds will be covered by capital gains arising from capital appreciation of existing bonds.
When the interest rate increases, fund managers reduce the Macaulay duration of the portfolio, thereby minimising capital losses. Fund managers also consider the credit quality of debt instruments while investing. This makes low-duration funds a suitable for investors with a moderate risk appetite.
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Return
Low duration funds have historically provided better return than, overnight or liquid funds. The underlying financial instruments come with two sources of income which adds to their attractiveness in the investment market.
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Risk management
Fund managers play an active role in managing the fund’s portfolio. They make decisions for optimising the portfolio and providing returns to investors. Their active presence helps in mitigating the risk involved in this investment.
Disadvantages of Investing in Low Duration Mutual Funds
One of these funds’ most significant limitations is credit risks. SEBI has no restrictions or specific guidelines directing fund managers of these schemes to avoid certain types of debt securities. Hence, many fund managers invest in relatively low-rated instruments hoping for higher returns.
Things to Consider before Investing in Low Duration Mutual Funds
You must consider the following things before investing in these funds:
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Expense ratio
Another important thing that one must consider before investing money in these funds is their expense ratio. The expense ratio directly impacts the returns that investors will receive at the time of redemption. One must thoroughly review the expense ratios of different funds in the same category before making a decision.
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Fund manager’s performance
A fund manager plays a pivotal role in overseeing the fund’s operation. Decisions taken by them have a direct bearing on the performance of the fund. Investors must analyse a fund manager’s past performance and see whether their strategies or vision will lead to the fulfilment of their financial objective.
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Risk appetite
These funds are most suitable for investors with moderate risk tolerance. These are not entirely risk-free, and completely risk-averse investors can avoid these mutual fund schemes.
Taxation of Low Duration Funds
Capital gains arising from the sale of units come under the purview of taxation. Capital gain is the difference between the purchase and sale price. It is taxable under two heads, which are given below:
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Short-term capital gains tax.
If the holding period of this fund is less than 36 months or three years, all gains are taxed as per the income tax slab rate of the investor.
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Long-term capital gains tax
If the holding period is 36 months or more, then gains arising from these funds are subject to LTCG tax. The rate of taxation for LTCG is 20% with indexation benefits.
Final Word
Low-duration funds are the most suitable investment option for high returns with moderate risk tolerance. This detailed guide about top-performing funds will help you make an informed decision.
You can visit Kuvera to start investing in the best-performing low-duration funds of 2022 without paying any commission.
Frequently Asked Questions
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Do I have to pay exit load for low-duration funds?
It depends on fund houses whether they want to impose an exit load on investors. It varies from mutual fund scheme to mutual fund scheme. So, you must check the scheme-related documents carefully before investing.
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Is there any lock-in period for low-duration funds?
Low-duration funds do not come with any lock-in period for investors. They are highly liquid; individuals can redeem their investment as and when they want.
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