- About Coverfox
Low duration debt funds are open ended mutual fund schemes that puts investors’ money in debt fund for a shorter tenure.
Diversifying your investment portfolio is the wisest decision for earning lucrative returns. The entire portfolio should incorporate investment instruments that offer unique features like high liquidity, short tenure or longer tenure for safeguarding future financial needs etc. So, when it comes to listing down short tenure investment instruments – low duration debt funds are one of the leading options. This article will help you understand this investment instrument in detail.
Low duration debt fund is an investment instrument that invests the investors’ money in mutual fund schemes, spanning usually between 1 to 3 years. The Securities Exchange Board of India (SEBI) defines low duration debt funds as instruments that hold investors money debt fund or money market security for a duration of one year to three year.
The investment done under this instrument usually has a moderate risk profile and it offers stable returns to the investor. The low duration debt funds are normally compared with fixed deposit receipts of banks as both these investment products offer similar features. However, if you are in search of a tax efficient and higher return offering instrument, then low duration debt fund is the instrument you must opt for. Fixed deposit offered by bank offer liquidity, returns and are tax effective, but they fall short in comparison to low duration debt funds.
As the name suggests, low duration debt funds is for shorter tenure, thereby making it one of the most sought investment instruments. Following are the key benefits offered by low duration debt funds:
We already know that the low duration debt fund holds the investors’ investment in debt fund and/or market securities for a shorter time duration. The holding period of investment under this instrument typically spans between one year to three year. The low duration debt fund usually invests money in debentures and/or bonds of companies, government enterprise, financial institutions etc. This fund also invests in money market instruments, namely commercial papers or certificate of deposit for the purpose of liquidity and higher returns in times of good returns.
The investor earns returns from this fund in two ways namely: interest on investment and gain or loss on the security prices included in the investment portfolio. The interest received on the investment is periodic in nature. However, it is important to note that any gain in the prices of the security will be added to the interest income, while a loss will reduce the income received from interest. The nature of the returns is not very volatile and hence, it is best suited for investors who are comfortable with interim volatility of the NAV and want to earn more than just interest income. The prices of the low duration debt fund depend on the interest rates i.e. when the interest rates fall the prices of the debt securities go up and viz.
Low duration debt fund offers good returns in shorter tenure. However, there are certain following key factors that every investor must consider before investing.
If you are not a comfortable taking high risk associated with capital market, then this fund is for you as the fund managers usually invest in funds that have high credit rating. Therefore, there is least possibility of default.
Since they offer low risk as compared to long-term debt funds, the returns earned are lower as compared to returns earned on investment under long-term debt funds.
This instrument is best suited for investors who want to protect their capital.
As these funds are for short duration, the administration charges i.e. the expense ratio associated with the management of investment under low duration debt funds might be higher. So, it is advised to understand the charges and fee associated with investment.
This instrument is best suited for investors who want to invest for a shorter tenure and not a longer investment horizon. Thus, in this manner, you can plan your investment portfolio and include low duration debt funds for earning returns in a short period of time. These returns are more than the amount earned on your banking accounts and are stable in nature.
Recommended Read: Is Shifting to Direct Mutual Fund Plans a Good Decision?