Low duration funds invest in debt and money market instruments of a certain duration profile, such that the portfolio’s Macaulay Duration is between 6 to 12 months. The term structure of interest rates, popularly known as the yield curve, is usually upward sloping. This means that longer duration debt or money market securities give higher yields than shorter duration securities. As such, low duration funds have the potential to give higher returns than liquid and ultra-short duration debt funds. Low duration funds have limited interest rate risk and fairly high liquidity. These funds are more volatile than liquid and ultra-short term debt funds. In an environment of rapidly rising yields, these funds can underperform liquid funds. That is why you should have a sufficiently long investment tenor of at least 6 to 12 months for these funds. It is important that investors match their investment tenors with the duration profile of a fund.
