Low Duration Mutual Funds

If you are looking for an investment vehicle that gives higher returns than a standard savings account and at the same time has lower risks, low duration mutual funds may be the best fit. Low duration mutual funds have been designed for investors who aim to invest in the market for a shorter duration without exposing themselves to high levels of risk.

What are Low Duration Mutual Funds?

Low Duration Mutual Funds fall under the debt mutual funds category, where the investments are made in fixed income instruments like government bonds, treasury bills, commercial papers, and corporate bonds. The average maturity period of low duration mutual funds is about 6 to 12 months.

Due to short maturity periods, these mutual funds are least influenced by any changes in interest rates as compared to long term debt funds. It makes them less volatile and provides opportunities to earn better returns than savings and fixed deposits.

Feature of Low Duration Mutual Funds

• Short Investment Horizon: Low Duration Mutual Funds are best suited for investors who plan to invest for a duration of about 6 to 12 months. They can be helpful in meeting short-term objectives.
• Lower Interest Rate Risk: These funds are less sensitive to changes in interest rates since the underlying securities mature within a shorter period. This makes them relatively more stable than long-duration debt funds.
• Better Liquidity: Most low duration mutual funds allow investors to redeem their investments easily. This makes them a convenient option when you may need access to your money.
• Diversified Portfolio: Low duration mutual funds make investment in a range of debt securities issued by government bodies, financial institutions, and corporates.

How to Invest in Low Duration Mutual Funds?

You can invest in low duration mutual funds by following simple process:

Step 1: Choose investment mode. You can invest through:

• AMC websites
• Online investment platforms provided by stockbrokers
• Mutual fund distributors

Step 2: Choose a suitable low duration mutual fund.

Step 3: Choose between Systematic Investment Plan (SIP) and Lump sum based on your goal and make investment.

Step 4: Make payment through UPI, netbanking or other available methods.

Why to Invest in Low Duration Mutual Funds?

• Good for Short Term: If you want to save money for vacations, home improvements, emergencies, or upcoming bills, then these funds will allow you to make profits by investing in them.
• Higher Profit Potential than Normal Savings: Even though the profit is not guaranteed, low duration mutual funds have the potential of generating higher profits compared to normal savings in the short run.
• Less Volatility: These funds experience lower price fluctuations as compared to equity funds. This makes them suitable for conservative investors.
• Easy Access to Funds: Most schemes offer convenient redemption, allowing investors to withdraw money when required. This provides flexibility without locking your investment for long periods.

Taxation of Low Duration Mutual Funds

Taxation of Fresh Investments (Onwards from April 1, 2023)

The entire capital gain by selling low duration funds, irrespective of the holding period, would be short-term capital gain. This gain would be fully added to the individual's income and would be liable to Income Tax at the appropriate slab rate. There is no option for indexation.

Taxes on Legacy Investments (Pre-April 1, 2023)

• Holding Less than 24 Months: Gain will be considered STCG and will be included in the total individual income for tax at the slab rate.
• Holding Over 24 Months: Gain will be considered LTCG and will be taxable at a flat rate of 12.5%, without any benefit of indexation.