What is a short-duration debt fund?


Debt funds offer a solid alternative for those looking beyond the usual investment options. These funds come in distinct variants such as overnight funds, liquid funds, ultra-short duration funds, low duration funds, money market funds, medium duration funds, medium to long duration funds, long duration funds, dynamic bonds, corporate bond funds, credit risk funds, banking and PSU funds, gilt funds, floater funds and the one that is being highlighted here is —short duration funds.

Before elaborating on what short-duration debt funds are, let’s understand what debt fund is.

What is a debt fund?

Debt mutual funds channel money into fixed-income securities such as treasury bills, corporate bonds, commercial papers, and government securities. These instruments come with a predetermined maturity date and interest rate, ensuring a fixed income for the investor upon maturity. Aptly named fixed-income securities, their returns remain relatively stable, unaffected by market fluctuations. This characteristic makes debt securities a suitable choice for low-risk investors.

Now, what’s a short-duration debt fund?

Well, it is a type of debt fund that deals with short-term debt and money market securities. According to the rules set by SEBI (Securities and Exchange Board of India), these funds need to keep their Macaulay duration between one and three years. Now, Macaulay duration measures how much a portfolio reacts to changes in interest rates. With an investment time frame of between one and three years, the interest rate risk is low to moderate.

Benefits of short-duration funds

Reduced interest rate risk

Investors benefit from lowered interest rate risk, thanks to the mandated lower Macaulay duration. This strategic move cushions against the potential negative impacts of interest rate fluctuations.

Enhanced accrual income

In India, where the yield curve generally rises, short-duration funds (with a duration of one to three years) offer investors the potential for better returns through increased accrual income from debt securities.

Effective credit risk management

Fund managers diligently undergo credit risk by scrutinising the financial health of issuer entities and actively monitoring significant events affecting them. This prudent approach safeguards mutual fund investments.

Optimised Macaulay duration

With a mandated Macaulay duration between one and three years, investors can capitalise on the ascending interest rate curve while maintaining a balanced level of interest rate risk. Rigorous due diligence and research manage credit risk effectively before committing to debt securities.

How to invest in short-duration debt funds?

Submission channels

Submit application forms at official Points of Acceptance (POA) for mutual funds or conveniently invest online through the website/mobile app of the mutual fund house or Registrar & Transfer Agent (R&TA).

Holding options

Hold units in either investor folios or a Demat account. Consider registering an SIP (systematic investment plan) for regular and systematic investments in these funds.

What is the taxation rule for short-duration debt funds?

Starting from April 1 of the current year, the growth option of debt funds is taxable at the investor’s marginal slab rate, emphasising the need for a well-informed tax strategy.

To conclude, short-duration funds present a strategic investment option for investors, offering potential returns with a balanced approach to risk management. So, make informed investment choices and take the help of a financial advisor in case of any confusion. Happy investing!

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