Best Low Duration Mutual Funds

Low duration funds fall under the category of debt funds, and they invest in short-term debt securities, where the duration of the fund portfolio is between a period of 6 months to 12 months.

When these funds are compared to overnight or even liquid funds, Low duration funds will hold assets for a longer time period and lower credit quality. This means they have a higher interest rate risk and credit risk in comparison. You can take a look at the best low duration funds given in the table below.

The investors who can comfortably invest in these funds are:

1. Investors who Hold a 3+ Month Investment Horizon

Low duration funds are found to be the most suitable for investors with an investment horizon of over three months. Investors who have a very short investment horizon are better off making investments in overnight or liquid funds.

The 3-month holding period ensures the best returns and performance of the fund. Investors could use them to temporarily park surpluses from property sales, annual bonuses, and so on or to accumulate cash for short-term financial purposes.

2. Investors Seeking Regular Income

Low duration funds generate consistent income through a combination of interest and capital gains. Investors with a moderate risk tolerance can devote a portion of their portfolio to these funds and use a SWP to generate an income stream.

3. Investors Seeking Alternatives to Bank Deposits

Low duration funds may be more appealing to investors with a modest risk appetite than bank deposits because they provide better liquidity and have the potential to achieve larger market-linked returns.

The major factors to be considered when finding the top low duration funds for investment are-

1. Taxation: Though they are short-term funds, the capital gains earned from Low duration funds will be taxed. Though the dividend is not taxed, capital gains are taxed according to how long the investor holds the units of the fund. 
2. Historic Returns: Rather than being amazed by the most recent return statistic, investors should look at previous years' returns to ensure that the fund has consistently done well.
3. Expense Ratio: Expense ratios in Low duration funds are often low. But still, it is critical to monitor this parameter because it affects the final investment return. An increase in the expense ratio, whether sudden or gradual, must be analyzed and comprehended, or it can take a big chip off your returns.

Here are some major advantages of investing in top low duration mutual funds –

Active risk management: Fund managers actively optimise portfolios as per market conditions to offer optimal returns.

Higher returns: The best low duration mutual funds generate higher returns than few other types of debt funds. They take on greater credit risk and invest in shorter maturity bonds that offer better performance.

Moderate risk: Low duration funds involve moderate risk as they do not hold securities for more than 6 – 12 months. Hence, these funds are notably less vulnerable to inflation risks and interest rate risks. 

Mode of investment: There are two investing methods for low duration mutual funds, lump sum, and SIP. The former is self-explanatory, and the latter is an instalment scheme via which you can deposit funds in regular intervals.

Being a debt fund, the best low duration mutual funds have a lower risk-return ratio than equity funds. However, it may invest in low-rated debt securities to yield higher returns, making it more risk-prone than other types of debt funds.

The risks to consider while finding and investing in the top low duration mutual funds for your portfolio are-

1. Exposure to Low-Quality Debt: These funds could have exposure to low-quality funds, which can cause the fund's value to drop, and the investor will either have to choose between selling out at a loss or holding their units at the discounted value. 
2. It is Subject to Volatility: These Low duration funds are actively managed to generate returns. Therefore, the fund value will be subject to some kind of volatility. 
3. Interest Rate Risk: Investors must be aware of this interest rate risk and ensure that it corresponds to their risk tolerance and aims.