A Short Duration Fund holds debt with a Macaulay duration of 1–3 years — designed for investors with a 1–3 year investment horizon seeking better returns than savings instruments.
SEBI defines short duration funds as having portfolio Macaulay duration between 1 and 3 years. They can invest in government securities, corporate bonds, bank bonds, and money market instruments within this duration range. With a 1–3 year duration, they have moderate interest rate sensitivity — rising rates cause short-term NAV dips, but the impact is cushioned by the portfolio's relatively short maturity profile.
A short duration fund is suitable for money you won't need for 1–3 years. It offers better potential returns than ultra-short or low duration funds while maintaining moderate risk. If interest rates rise sharply, there might be a small temporary dip in NAV — but over a full year, returns typically stabilise positively. These are often used for medium-term goals like emergency funds beyond the immediate buffer.
Macaulay duration: 1–3 years.
Can invest across the credit quality spectrum — check credit ratings of holdings.
Duration implies moderate sensitivity to rate changes.
Post-tax returns often better than FDs over 2–3 year periods (for investors in higher tax brackets, pre-April 2023).