A Low Duration Fund holds debt instruments with a Macaulay duration of 6–12 months — offering better returns than ultra-short funds with manageable interest rate risk for 6–12 month horizons.
SEBI defines low duration funds as having a portfolio Macaulay duration between 6 and 12 months. They can invest in corporate bonds, bank CDs, commercial paper, and G-secs within this duration band. They have slightly more interest rate sensitivity than ultra-short funds — if rates rise unexpectedly, short-term NAV can dip. But for 6–12 month investment horizons, they generally outperform savings accounts and liquid funds.
Low duration funds are the next level up from ultra-short funds — for money you're happy to keep for 6–12 months. The longer you commit, the higher the potential return. Still low risk by debt fund standards. Good for goals that are 6–12 months away — like a down payment you're saving toward.
Macaulay duration: 6–12 months.
Invests across government securities, corporate bonds, CDs with matching maturities.
Can hold some lower-rated (AA and below) instruments — check credit quality carefully.
Some low duration funds have had credit events — SEBI now mandates disclosure of credit risks.