Table of Contents
Introduction
Low duration funds offer investors a balanced approach, positioned between ultra-short-term and traditional bond funds. Investing primarily in bonds with maturities of 6 months to a year, they provide slightly higher returns than ultra-short options while emphasising safety through high-quality debt securities. Here, we’ll explore the features, types, risks, and potential returns of Ultra Short Funds.
What are Low Duration Funds?
Low Duration Funds are a category of debt mutual funds that invest in fixed-income securities with a portfolio duration of 6 to 12 months. These funds aim to provide a balance between stability, liquidity, and returns, making them an ideal choice for investors seeking short-term investment avenues without significant exposure to interest rate fluctuations.
How do Low Duration Funds work?
Low Duration Funds allocate assets to various fixed-income instruments, including corporate bonds, government securities, money market funds, and treasury bills. These funds maintain a moderate duration, ensuring they are less sensitive to interest rate movements compared to long-duration funds.
Fund managers employ duration management strategies to optimize returns while minimizing risk. Additionally, some funds implement a roll-down strategy, where bonds are held until maturity to take advantage of the declining yield curve, thus generating stable returns.
Features of Low Duration Funds
- Short Duration Focus: Prioritise debt securities with maturities between one to three years, reducing interest rate risk.
- Lower Interest Rate Sensitivity: Exhibit lower sensitivity to interest rate changes, reducing price volatility.
- Capital Preservation: Emphasise capital preservation and stability, suitable for shorter investment horizons.
- Income Generation: Aim to generate income through interest payments from debt securities.
- Liquidity: Offer high liquidity, allowing easy redemption of units without significant costs or penalties.
Comparison with Other Debt Funds
- Liquid Funds & Overnight Funds: Offer higher liquidity but lower returns.
- Ultra Short Funds: Invest in securities with slightly shorter duration than low-duration funds but share similar risk characteristics.
- Medium Duration Funds & Dynamic Bond Funds: More sensitive to interest rate changes, making them suitable for long-term investors.
- Gilt Funds & Gilt Funds with 10-Year Constant Duration: Invest in government securities and provide safety but with higher volatility.
- Credit Risk Funds: Offer higher returns but with increased credit risk due to lower-rated bond exposure.
Who Should Invest in Low Duration Funds?
Low Duration Funds are suitable for conservative investors looking for a short-term investment option with better returns than savings accounts and fixed deposits. These funds work well for individuals with an investment horizon of 6 to 12 months who want stability and liquidity while minimizing interest rate risk.
Conclusion
Low Duration Funds offer an attractive proposition for investors seeking moderate risk, stable returns, and liquidity in the fixed-income space. By balancing duration management and interest rate movement strategies, these funds provide an effective short-term investment avenue. However, investors must consider their risk tolerance and investment goals before investing in these funds.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.