Best Low-Duration Mutual Funds to Maximize Returns in 2025

Introduction

Low-duration funds are a type of debt mutual fund that focuses on short-term debt instruments, typically maintaining a portfolio duration ranging from 6 to 12 months. These funds are designed to provide a balance between stability and returns over a short investment horizon. Unlike liquid or overnight funds, which hold assets for extremely short periods, low-duration funds maintain their investments for a slightly longer period and may include securities with lower credit ratings. This longer holding period results in a greater exposure to interest rates and credit risks. Below, you can explore a list of the best low-duration funds currently available.

Leading Low-Duration Mutual Funds to Consider in India

Overview of Top Low -Duration Mutual fund

Sundaram Low Duration Fund

The Sundaram Low Duration Fund is an open-ended low-duration debt scheme that invests in instruments with a Macaulay duration between 6 and 12 months. It involves a relatively higher interest rate risk along with moderate credit risk. This fund has been merged with the Principal Low Duration Fund, leading to a renaming of the surviving scheme.

Product Suitability

This product is suitable for investors seeking:

• Short-term income.
• Access to liquidity through investments mainly in money market instruments and debt securities.

Investors are encouraged to consult their financial advisors if uncertain about the product's suitability.

Fund Features

• Rated AAA by CARE, indicating high credit quality.
• Invests in instruments with strong credit ratings.
• Aims to generate higher returns compared to liquid funds.
• Designed as a low-volatility, low-duration fund, providing steady accrual income.

The fund has outperformed other funds in the same category in terms of returns.

A lower expense ratio indicates improved long-term returns.

The fund has not achieved better price returns compared to bank fixed deposits (FDs).

UTI Low Duration Fund

The UTI Low Duration Fund is an open-ended low-duration debt scheme that invests in instruments with a Macaulay duration of 6 to 12 months. This fund focuses on high credit quality debt issuers, aiming to deliver reasonable returns with low volatility over the short term. By maintaining a portfolio duration of around 6 to 12 months, it offers a high degree of liquidity. It is ideal for investors looking to park their money for a short period, typically with an investment horizon of 6 to 12 months.

The UTI Low Duration Fund seeks to create a well-diversified portfolio that primarily consists of high-quality credit debt issuers. With a strategic focus, the fund plans to invest 80-100% of its assets in AAA-rated or equivalent issuers, ensuring a high standard of credit quality. The portfolio is designed to maintain a duration ranging from 6 to 12 months, striking a balance between risk and return.

By focusing on high-credit-quality investments and a relatively short portfolio duration, the fund effectively reduces exposure to interest rate fluctuations and mitigates liquidity risks. As such, the UTI Low Duration Fund serves as a more attractive alternative to traditional short-term investment options, appealing to those seeking reasonable returns with a focus on stability and liquidity.

Axis Treasury Advantage Direct Fund

The Axis Treasury Advantage Fund - Regular Plan is an open-ended low-duration debt scheme offered by Axis Mutual Fund, launched on October 9, 2009. The fund aims to achieve reasonable returns while maintaining low risk and a high degree of liquidity by investing in a portfolio of money market and short-term debt securities. Its performance is benchmarked against the NIFTY Low Duration Debt Index B-I, providing a reliable reference point for assessing the fund's effectiveness in meeting its investment objectives.

As of October 11, 2024, the Axis Treasury Advantage Fund - Regular Plan has a Net Asset Value (NAV) of Rs 2,928.87 for its Growth option. The fund's trailing returns are 7.5% (1 year), 6.01% (3 and 5 years), and 7.41% since launch, compared to category returns of 7.26% (1 year), 5.77% (3 years), and 6.02% (5 years). It manages assets of Rs 5,599.1 crore and has an expense ratio of 0.66%. There is no exit load, with a minimum investment requirement of Rs 5,000 and Rs 1,000 for additional investments or SIPs.

Overview of Top Low-Duration Mutual Fund 2025

Sundaram Low Duration Fund – Direct Growth

The Sundaram Low Duration Fund, a debt-oriented scheme from Sundaram Mutual Funds, aims to provide stable returns with relatively lower risk, making it a suitable option for conservative investors. Over the past three years, the fund has delivered an annualized return of 7.72%, while its five-year performance stands at 7.79%, reflecting consistent returns across varying market conditions.

For investors looking to start, the minimum investment required is Rs. 1,000 through both lump sum and SIP modes, making it accessible for those beginning their mutual fund journey as well as seasoned investors seeking diversification.

LIC MF Low Duration Fund Direct Growth

The LIC MF Low Duration Fund, offered under the debt category of LIC Mutual Funds, is designed to balance stability and moderate growth for investors with short-term horizons. Over the last three years, it has delivered 7.55% annualized returns, while the five-year performance stands at 6.22%, reflecting steady but slightly moderate returns compared to some peers.

Investors can begin with a minimum lump sum investment of Rs. 5,000 or opt for a Systematic Investment Plan (SIP) starting at just Rs. 200, making it a flexible choice for those who prefer gradual, disciplined investing.

HSBC Low Duration Fund Direct Growth

The HSBC Low Duration Fund, a debt scheme under HSBC Mutual Funds, is tailored for investors seeking a balance of liquidity and consistent returns in the short-term debt space. Over the past three years, it has generated 8.2% annualized returns, while its five-year performance stands at 6.62%, showcasing a solid track record across varying market cycles.

Investors can enter the fund with a one-time investment starting at Rs. 5,000, or opt for a SIP from Rs. 1,000, providing convenient options for portfolio diversification in debt.

Who Should Consider Investing in Low-Duration Mutual Funds?

Low-duration mutual funds are ideal for investors who have a short-term investment outlook, typically ranging from 3 to 12 months. These funds are particularly suitable for those looking to park their surplus funds temporarily, such as proceeds from property sales or annual bonuses, while still seeking better returns than traditional savings accounts.

For investors with a time frame of around three months, these funds can deliver relatively stable returns, balancing the need for liquidity with potential earnings. Compared to overnight or liquid funds, which cater to very short-term needs, low-duration funds hold assets for a slightly longer period, allowing them to capture better market opportunities while accepting moderate levels of risk.

Low duration funds can generate income through a mix of interest payouts and capital appreciation, making them appealing for those who have a moderate tolerance for risk. They can also serve as a source of regular income if used alongside a Systematic Withdrawal Plan (SWP). Additionally, these funds can offer more liquidity and potentially higher returns compared to fixed deposits, making them an attractive option for conservative investors who are open to a bit more risk for potentially better gains.

Key Considerations for Investing in Low-Duration Funds

When selecting the best low-duration funds for investment, it's important to evaluate several critical factors:

• Tax Implications: Even though low-duration funds are meant for short-term investments, any capital gains they generate are subject to taxation. The rate of taxation depends on the holding period of the fund units. While dividends from these funds might be exempt from direct taxes, the capital gains are taxed as per short-term or long-term capital gains rules.
• Past Performance Consistency: Instead of focusing solely on recent returns, investors should analyze the fund’s performance over several years. A history of stable and consistent returns often serves as a more reliable measure of a fund's dependability and its capability to perform well across varying market conditions.
• Expense Ratio: Generally, low-duration funds feature lower expense ratios than many other types of mutual funds. However, it’s crucial to keep an eye on these expenses, as they directly impact your net returns. A sudden increase in the expense ratio can significantly reduce the overall gains from your investment, making it important to understand and monitor this cost.

By thoroughly evaluating these factors, investors can make well-informed choices when selecting low-duration funds, ensuring their investments are in line with their financial objectives and risk appetite.

Key Benefits and Risks of Low-Duration Mutual Funds

Investing in low-duration mutual funds offers several compelling advantages for investors seeking short-term opportunities. One of the primary benefits is active risk management, where fund managers continuously adjust portfolios based on market conditions to maximize returns. Additionally, these funds typically deliver higher returns than many other debt fund types, as they invest in shorter-maturity bonds and take on greater credit risk, which can lead to better performance.

Low-duration mutual funds offer a moderate level of risk exposure. With a holding period of 6 to 12 months, these funds are less susceptible to the risks associated with interest rate fluctuations and inflation. Investors can choose from various investment approaches, including lump sum investments or systematic investment plans (SIPs), allowing for flexibility in how they allocate their funds. Although they generally carry a lower risk-return profile compared to equity funds, some may invest in lower-rated securities to achieve higher yields, introducing a slightly increased risk factor.

On the other hand, potential investors should be aware of the associated risks. One significant risk is the exposure to lower-quality securities, which can lead to declines in the fund's value, compelling investors to either sell at a loss or hold onto depreciated units. Additionally, the actively managed nature of these funds can result in market volatility, as their value can fluctuate based on prevailing market conditions. It's also essential to consider interest rate risk, as fluctuations in interest rates can affect the value of the assets held within the fund. Thus, investors must ensure that their risk tolerance aligns with these factors to make informed decisions about including low-duration mutual funds in their investment strategies.

Conclusion

In 2025, low-duration mutual funds continue to be an appealing option for investors seeking steady returns with manageable risk over short investment horizons. By investing in debt instruments with maturities of 6 to 12 months, these funds offer a balance of liquidity, income, and stability—making them a suitable alternative to traditional savings avenues. Options such as Sundaram, LIC, and HSBC Low Duration Funds showcase the diversity in this category, with varying entry points and return profiles to suit different investor preferences.

Although they are generally less risky than equity investments, low-duration funds remain sensitive to factors like interest rate changes, credit quality, and expense ratios. Evaluating these aspects carefully ensures better alignment with individual goals. Overall, these funds can serve as a reliable tool for parking surplus funds, meeting short-term financial needs, and adding diversification to investment portfolios in 2025.

Frequently Asked Questions

What are low duration funds?

Low-duration funds are designed for investors with a short-term investment horizon, typically between 6 to 12 months. Although they tend to be a bit more volatile than ultra-short funds, they are typically viewed as safer than equity funds.

What are the benefits of low duration funds?

These funds tend to perform strongly when interest rates are on the decline. In the event of rising rates, they strategically shorten their duration to mitigate capital losses and take advantage of higher interest rates through new investments. They are particularly suitable for investors with a moderate risk appetite.

What is the ideal time to invest in a low-duration mutual fund?

If you can commit to an investment horizon of 6 to 12 months, low duration funds may be a good choice. Their lower volatility makes them a viable alternative to traditional bank accounts for those seeking short-term investments.

Do short-term funds yield better returns than fixed deposits?

Yes, low duration funds typically offer better returns compared to bank fixed deposits for similar investment durations, all while maintaining relatively low risks.

What assets do low duration funds invest in?

Low duration funds have a diverse investment portfolio that includes money market securities, government bonds, hybrid instruments, corporate bonds, and various other assets.

Disclaimer:  This blog is dedicated exclusively for educational purposes. Please note that the securities and investments mentioned here are provided for informative purposes only and should not be construed as recommendations. Kindly ensure thorough research prior to making any investment decisions. Participation in the securities market carries inherent risks, and it's important to carefully review all associated documents before committing to investments. Please be aware that the attainment of investment objectives is not guaranteed. It's important to note that the past performance of securities and instruments does not reliably predict future performance.