Short Duration Mutual Funds

Short term funds, also known as short duration funds, are open-ended mutual funds that invest in debt and money market instruments. These funds have a Macaulay duration of 1 year to 3 years.

Since they are open-ended, investors have the flexibility to redeem their investment at any time, though applicable exit load charges may apply based on the chosen mutual fund scheme.

A short duration mutual fund operates by pooling capital from multiple investors to invest in debt and money market instruments. As specified by SEBI, these funds maintain an average portfolio duration of 1 to 3 years. The fund manager continuously adjusts the portfolio according to the fund’s defined investment strategy by assessing interest rate movements, issuer credit risk, and market liquidity.

To manage the portfolio, the manager may rebalance holdings, reinvest maturing assets, or make minor adjustments to the overall duration.

Investing in short-duration funds through Paisabazaar is a streamlined process that takes just a few quick steps:

• Log in to your Paisabazaar account.
• After logging in, click on the ‘mutual fund’ option.
• Choose a fund that matches your financial goals and risk preferences.
• After finalising the fund, choose your investment mode.
• Enter the investment amount and complete your KYC verification.

• Align with your investment horizon: Consider whether the fund's duration and risk profile are appropriate for your investment horizon.
• Consider the expense ratio: Mutual funds charge an annual expense ratio. Even small differences can influence overall investment returns.

• Review exit load and holding period: Certain funds impose an exit load in case of early redemption. Always verify the specific exit load structure and holding terms before selecting a fund.

• Assess the fund manager’s expertise: Check the fund manager's investment strategy and proven track record, especially in managing short duration funds through different interest rate cycles.

Understanding taxation is essential, as post-tax returns may vary. Taxation of short duration mutual funds depends on the holding period. 

1. Investments made on or after 1 April 2023: Capital gains are treated as short term capital gains and are taxed at your applicable income slab rate (any holding period).

2. Older Funds (Bought before 1 April 2023): Short term capital gains are taxed as per your slab rate. Long-term capital gains are taxed at 12.5% without indexation.