Know the Difference: Short Duration Versus Low Duration Funds

Low duration funds and short duration funds are a type of debt mutual fund schemes. However, there are certain key differences between the two schemes.

Low duration funds, as per the markets regulator the Securities and Exchange Board of India (SEBI), are mandated to invest in debt and money market instruments in a way that the Macaulay duration (a measure of time taken to recover the principal of a bond to be repaid from internal cash flows generated by the bond) of the portfolio is between 6-12 months. 

Short maturity debt funds such as low duration funds tend to perform well during phases of rising interest rates. 

At the same time, short duration funds, also referred to as short-term bond funds, tend to invest primarily in debt securities with a maturity of 3-4 years. Such funds invest in a mix of government and corporate bonds, treasury bills, etc. The objective of short duration funds is to generate regular income for investors while keeping a tab on the risk profile, which is low.

Among the key features of short duration funds include its duration. This refers to the average maturity of the underlying securities in the investment portfolio. Comparatively, a short duration fund has a lower duration than a long duration fund. This means that the portfolio is invested in securities which generally have a shorter maturity period. This is what makes short duration funds immune to interest rate fluctuations. This is what makes such funds a relatively safe investment tool.

For an investor, low duration funds can be an essential tool to address their short-term financial goals. 

Similarly, short duration funds are ideal for those who are eyeing a relatively safe investment option with potential to offer regular income. A key point to remember is, as with any investment, it is crucial to undertake adequate research and consult with a professional financial advisor before making any investment decisions.