Rahul, an avid biker often went out with his friends on the weekends riding over rough and hard terrain. He now has his heart set on owning the latest bike model, which is a fully loaded model that will be launched within the next six months.

He has been saving for his passion for a while and has almost accumulated the required amount. But instead of keeping his funds idle in his account, why not consider parking the earmarked money in a low duration mutual fund, which offers immediate liquidity while providing a reasonable rate of return?

What is a low duration fund?

These are mutual fund schemes investing in debt instruments and money market products. The Macaulay Duration of these funds is between six and 12 months and is suitable for investors who have a low-risk appetite with an investment horizon of up to one year.

Low duration funds have a longer maturity period as compared to overnight or liquid funds. Investors can invest their money for 6 to 12 months and earn reasonable returns.

Who should invest in these funds?

These funds are recommended for investors whose investment horizon is at least three months or longer. If your investment horizon is shorter, opting for liquid or overnight funds is more advisable. The low duration MFs can deliver higher returns in exchange for a slightly higher risk. Surplus funds from an annual bonus or asset sale can be invested in these funds to meet short-term financial goals.

Also Read: How a Low Duration Fund could help you achieve your short-term goals?

Such types of funds are also suitable for investors who want an alternative to traditional saving instruments.

An investor can also choose these funds to hold money while using a systematic transfer plan to invest in an equity oriented mutual funds. Generally, liquid funds are widely used for this routing but if you have a little higher risk tolerance, you can aim to benefit from a higher return on these funds.

Click here to check - Types of Mutual Funds

Taxation of low duration funds

The capital gains earned in these funds are added to the investor’s income and taxed at their applicable slab.

Also read: A Guide to Income Tax Slab for FY 2022-23 (AY 2023-24)

Advantages of investing in low duration funds

Here are some advantages of investing in these types of mutual funds:

• Lower risks as the funds are invested in high-quality debt instruments.

• Due to lower volatility and risk, these funds can be beneficial for portfolio diversification.

• Such mutual funds are less sensitive to interest rate changes, which enables them to deliver relatively stable returns.

• Low duration funds have higher liquidity, which means you can withdraw the money whenever needed without any difficulty.

In conclusion, investing in a low duration fund can potentially provide investors with higher liquidity and flexibility. To further explore the benefits of low duration funds, one option worth considering is the Aditya Birla Sun Life Low Duration Fund . It is a suitable investment option for those seeking to park their funds for a shorter duration while generating reasonable returns

Aditya Birla Sun Life Low Duration Fund

(An open ended low duration debt scheme investing in instruments such that Macaulay duration of the portfolio is between 6 months and 12 months)

This product is suitable for investors who are seeking*

• Reasonable returns with convenience of liquidity over short term
• Investment in a basket of debt and money market instruments of short maturities

 

*Investors should consult their financial advisers if in doubt whether the product is suitable for them.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.