Understand the two categories of debt funds and which one suits you best
12-Aug-2022
Debt funds are divided into several categories. Here we speak about two duration-based categories - short duration and low duration funds.
While both the categories have reasonable flexibility to invest across debt and money market securities, short duration funds are mandated to maintain a Macaulay duration of one to three years. On the other hand, low duration funds have to maintain the same between six to 12 months. Thus technically, low-duration funds are suitable for a lower investment horizon while short-duration funds are ideal for a slightly longer-term horizon. The credit risk of these funds may vary across funds. Having said that, AMCs conventionally considered low-duration funds as high-yield offerings by investing in lower-rated papers in pursuit of higher returns.
As mentioned before there are too many categories of debt funds and you don't need so many. So, keep things simple, for goals of up to one year, consider liquid funds. These funds have the ability to generate reasonably better returns than a savings bank account. As for your goals of more than one year, you can stick to short duration funds.
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