Short-duration funds: Returns have peaked

When equity markets experience turbulence like it is right now, debt funds' much-needed stability comes to the forefront. For retail investors, a core debt portfolio should emphasise safety, reasonable returns (marginally higher than bank FDs), flexibility to invest across different kinds of bonds, and limited exposure to bonds of high maturity. In this regard, the short-duration funds tick all the boxes. These funds' versatility works through the ups and downs of an interest rate cycle. So, if you are a fixed-income investor who wants to keep it simple, this is your go-to bucket. Category snapshot No. of funds 26 Assets (in Rs lakh crore) 1.13 Average expense ratio 0.36% Category returns for 2024 7.34% Average high quality bonds exposure 92% Average medium quality bonds exposure 2% Average maturity (in years) 3.62 Average worst 1-yr return in 5 years 3% Note: Returns as of November 13, 2024; Rest of the figures as of September 30, 2024. Highlights & trends Performance: These funds continue to offer one-year returns of around 8 per cent, making them an attractive choice for fixed-income investors. However, it's worth keeping in mind that these returns might not increase much further in the near future. Continued exposure to longer-duration bonds: With potential rate cuts anticipated, short-duration funds have been keeping their allocation to longer-duration bonds high this year. The reason? If interest rates go down, these longer bonds could boost fund returns a bit by raising the NAVs. So, you might see some mild appreciation in value, though it's likely to be modest. Our handpicked funds Our Best Buy recommendations include Axis Short Term Fund , Bandhan Bond Fund Short Term Plan , HDFC Short Term Debt Fund and HSBC Short Duration Fund . Conservative choices: The HSBC and Bandhan funds are managed conservatively. These funds stand out for their resolve to stay away from lower-rated bonds, making them ideal for investors looking to invest with a limited horizon of two-three years. Optimised risk-return: Both HDFC and Axis funds offer a balance of risk and return, as they take calculated risk. Given the selective bets on duration and credit, these are suitable for the fixed-income allocation in your longer-term portfolio. Change in our recommendation Fund moved to Sell: Aditya Birla Sun Life Retirement Fund - The 50s Plus - Debt Plan Funds at a glance Name 1Y returns (%) High-quality exposure (%) Medium-quality exposure (%) Average maturity (in years) Yield to maturity* Expense ratio (%) Assets (Rs cr)