Low Duration Funds: Definition, Benefits, Taxation, & More

Low Duration Funds are debt funds that invest in debt and money market securities with up to 1-year maturity. 

Let’s say you have a big expense coming up in the next 6 to 12 months. For example, a wedding, moving into a new home, or your child’s educational milestone.

Low Duration Funds can make accumulation for these short term expenses easier for you. You can comfortably achieve your goals without significantly increasing the risk on your capital. 

Read till the end to know everything about these funds. 

How Do Low Duration Funds Work?

The underlying securities in Low Duration funds have up to 1 year of maturity. Fund Managers design the scheme keeping the Macaulay Duration between 6 to 12 months.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have a longer horizon than Liquid and Ultra Short debt funds and a shorter horizon than medium to long-term debt funds.

Investors planning to invest for a few months to a year can go for these funds. 

Top 4 Advantages of Low Duration Debt Funds

1. Suitable for Short-Term Investment Goals

Low Duration funds offer better liquidity compared to short, medium, and long-term debt funds. You can invest a lumpsum amount and withdraw it within a year.

Short-term tenure preferences can vary for each investor. Some would prefer liquid or ultra short duration funds for higher liquidity. 

Low Duration funds also qualify for a short-term goal that ranges between 6 months to a year.

2. Lower Risk

In the case of debt funds, the longer the maturity period the higher the volatility. The interest rate cycle can have a massive impact on debt funds.

Debt funds with comparatively shorter tenures mature quickly and blend with the new interest rate. That’s why they perform well during rising interest rates. On the other hand, long-duration funds are suitable during the falling interest rate scenario. 

As the investment horizon is short, Low Duration funds are less affected by the interest rate cycle. 

And as far as credit risk is concerned, fund managers often invest in securities with high credit quality. You can check the scheme details to understand credit risk. 

3. Potential For Superior Returns 

Debt funds often outperform the returns on FDs. FDs can be safe but the returns are not as good as debt funds.

You have a better chance to earn superior returns within a year with Low Duration funds than the FD. And as mentioned above, these funds deliver even better returns when the interest rates are rising or are steady at the peak. 

4. Diversification

Low Duration funds can be great for balancing the risk. If you have invested in equity mutual funds already, add debt funds to diversify your portfolio.

These funds are less riskier than equity funds. By investing in them, you can fight equity volatility to some extent. 

Things to Consider Before Investing in Low Duration Debt Funds

1. Credit Risk

Interest rates are cyclical and the risk arising out of the interest rate movement can be managed. Credit risk, on the other hand, can alter the outcomes. 

The majority of the debt funds, apart from Credit Risk funds, invest in high-credit quality assets. Sometimes, fund managers may bring a low-rated asset into the scheme if it has the potential to deliver superior returns. But overall credit risk is never high. 

We recommend checking the scheme factsheets to understand the credit quality of the underlying assets. 

2. Risk-Reward

Many investors distribute their money among debt funds to balance the overall risk. As equity funds deliver higher returns in the long run, debt funds offer security.

However, debt funds come with variable maturity periods and underlying assets. Liquid funds, Ultra short duration funds, and Low Duration funds offer safety against interest rate risk. But, the returns may not be as superior. 

Low Duration funds are safer than Dynamic bond funds or Gilt funds in terms of volatility. But the returns would be comparatively lower.

Invest in these funds based on your risk appetite. 

3. Investment Tenure

As mentioned above, these funds are more compatible with your goals outlined within 6-12 months. Otherwise, you have more options on the debt fund spectrum based on the tenure. 

Taxation on Low Duration Debt Funds

Before April 2023, investors had a benefit of 20% tax with indexation on long-term capital gains. However, the tax rules have been revised and the above benefit is no longer applicable to funds with less than 35% exposure to equity.

Now, both short and long-term capital gains on debt funds will be taxed as per your tax slab. 

Who Should Invest in Low Duration Debt Funds

The beauty of debt funds is, you can plan a certain expense by investing in specific types of debt funds. Low-duration funds are perfect if you are planning to achieve a milestone within a year. 

By investing your money for about a year, you can earn decent returns and balance your portfolio as well.

You can also start Systematic Transfer Plan with Low Duration funds. Instead of withdrawing your money, you can transfer it into different equity or debt funds in installments. 

STP works like SIP but within funds. Read more about STP here


Bigger expenses like a wedding, children’s education, or a new house can be stressful. Fortunately, you can plan it beforehand by investing in debt funds. 

Low Duration debt funds can be really helpful to fulfill your financial goals in the near future. Take advantage of debt funds to make your money work for more money as you plan your expenses. 

You can evaluate the timeline of your next big expense and choose suitable debt funds. 

For more insights on debt funds, contact our advisors. Get complimentary portfolio analysis and restructure your portfolio for better outcomes.