Short duration funds invest in debt and money market securities such that the Macaulay Duration of the scheme portfolio is 1 – 3 years. The funds usually aim to hold the debt and money market securities in their investment portfolios till maturity and accrue the interest / coupon paid the securities. Hence these types of debt mutual funds are also known as accrual based debt funds. Even if the prices of the securities fluctuate with changes with interest rate, the issuer of these securities will pay the face value on maturity. Therefore if the securities are held till maturity then interest rate changes will have no effect on investor returns. Though the NAVs of short duration funds can be slightly volatile in the short term, investors should ensure that their investment tenors match the average maturity profile to limit interest rate risk. Short duration funds invest in both Government Securities (G-Secs) and corporate bonds (NCDs). If a short duration fund has substantial exposure to corporate bonds, you should ensure that you are comfortable with the credit quality of the fund’s bond portfolio.
