Short duration funds can be a great addition to your portfolio. Read on to know all about these debt funds – advantages as well as how they score better than bank deposits.
What are short-duration funds
These are open-ended short-term debt funds that invest in debt and money market instruments with Macaulay duration of at least one year and not more than three years.
The short-duration fund category witnessed a 15% AUM growth in the year 2019 (source: Crisil Report). This growth rate is higher than what was witnessed by many equity schemes (such as large-cap, small-cap and mid-cap funds) and even debt schemes (such as a dynamic bond, medium duration, low duration, and credit risk).
Short Duration Debt fund – Advantages
- Less Risky
One of the biggest debt fund advantages is that they are less risky when compared to equities. Even within the debt category, funds have varying levels of risk. Higher is the maturity period of the underlying investment, higher is the risk. Short duration funds are considered less risky than higher duration funds (for example – medium, medium to long and long duration). They also have a lower risk of quotient when compared to credit risk funds.
- Steady Returns
Short Duration Funds are known for generating relatively stable returns across market cycles. Even events such as interest rate tightening by RBI do not greatly impact the fund’s value. In a growing market when the rates are increasing, these funds earn through enhanced interest income. In case of a downside, they switch to long-term debt instruments so as to create opportunities for capital gains.
- Liquidity
These debt funds offer good liquidity to investors. As a result, they can even come handy in case of sudden or unforeseen financial exigencies.
- Tax efficiencies
Short term funds are a great alternative for investors with a low to medium risk appetite who park their excess funds in bank deposits. One major area where short-term funds score over bank deposits is taxation related benefits.
Debt schemes get the benefit of indexation if the holding period is a minimum of three years. Indexation takes into account inflation for the period of investment. It inflates the purchase price and as a result, brings down the quantum of capital gains.
Long-term capital gains on debt funds attract 20% tax with the indexation benefit. For example, if the initial investment amount was Rs. 60,000 (year 2016) and the redemption value is Rs. 90,000. Without the benefit of indexation, the value of capital gains would be Rs. 30,000. However, with indexation:
Indexed investment value = Initial invested amount multiplied by (CII of the redemption year divided by CII of the year of initial investment)
Indexed cost of acquisition = 60,000 *(280/254) or Rs. 66,142. Hence, the taxable capital gains are Rs. 23,858.
Best short duration funds which can be a great addition to your portfolio
We understand that picking the best short duration fund can be quite a task. Especially with so many options available in the market. So, we have put together a list of the top-performing funds from this category after considering a range of factors such as consistency of performance, mean rolling returns, outperformance (benchmark and peers), ability to manage downside risk, etc.
The five best short duration funds in India currently are:
- IDFC All Seasons Bond Fund
|
Date of Launch |
CAGR (Since inception) |
5-year Returns |
3-Year Returns |
1-Year Returns |
|
September 2004 |
7.7% |
7.98% |
7.66% |
9.86% |
- IDFC Bond Fund Short Term Plan
|
Date of Launch |
CAGR (Since inception) |
5-year Returns |
3-Year Returns |
1-Year Returns |
|
December 2000 |
7.66% |
7.8% |
7.57% |
9.07% |
- HDFC Short Term Debt Fund
|
Date of Launch |
CAGR (Since inception) |
5-year Returns |
3-Year Returns |
1-Year Returns |
|
June 2010 |
8.58% |
7.92% |
7.53% |
8.39% |
- Invesco India Short Term Fund
|
Date of Launch |
CAGR (Since inception) |
5-year Returns |
3-Year Returns |
1-Year Returns |
|
March 2007 |
7.74% |
7.22% |
6.95% |
8.88% |
- SBI Short Term Debt Fund
|
Date of Launch |
CAGR (Since inception) |
5-year Returns |
3-Year Returns |
1-Year Returns |
|
July 2007 |
6.9% |
7.77% |
7.24% |
8.91% |
Final Words
Short duration funds are apt for investors with a low-risk appetite and a short investment horizon. They are financially a more lucrative option than FDs or savings accounts due to their potential for higher tax-adjusted returns.