Low duration funds are debt schemes that mainly invest in debt and money market securities, including government securities, corporate bonds, and other fixed-income instruments. As per SEBI's rules, these mutual funds must maintain a Macaulay duration of 6 to 12 months.

You can add these debt funds to your portfolio for short-term needs. They normally have lower interest rate risk compared to short-duration funds, which have a 1-3 year duration range.

These schemes' returns are market-linked. So, they aren't fixed like a regular bank deposit. The NAV can move up or down based on various factors like bond prices, interest rates, and credit ratings.

These funds may work for you if:

• You want to add debt exposure to your portfolio: If you have an SIP running in large-cap funds or flexi-cap funds, then pairing it with low duration schemes can balance your portfolio.
• You want an alternative beyond a savings account: Instead of keeping all your money in a bank's savings account, you can invest in this scheme and get debt exposure with potential for slightly higher returns.
• You have an investment horizon of 1-3 years: Low duration funds can be considered when your goal is a few years away. For very short-term needs, you can consider liquid funds or money market funds.
• You are comfortable with returns that can change: If you can handle seeing your investment value change as the NAV fluctuates, this category may be worth considering.

When you invest in this low duration scheme, the fund manager uses the money to buy different debt and money market securities. The portfolio is managed to keep its Macaulay duration between 6 and 12 months.

The fund earns money from the interest paid by its investments. It can also make or lose money when the prices of those securities change.

For example, suppose you invest ₹10,000 when the fund's NAV is ₹50. You receive 200 units (₹10,000/₹50). Now, if the fund's NAV move higher to ₹51, your 200 units would then be worth ₹10,200 (200 units x ₹51).

Your investment has gone up by ₹200 in this example. But the NAV could also fall. For example, if it moved to ₹49.50, your 200 units would be worth ₹9,900.

That's why you shouldn't treat low-duration funds like fixed deposits. The actual return depends on many factors such as underlying securities, credit quality, interest rates, and other market conditions.

• Lower interest rate sensitivity: Compared with longer-duration debt funds, such as medium-duration funds or corporate bond funds, these schemes react less to interest rate changes.
• Wider choice of debt securities: The fund manager can invest across different debt and money market instruments depending on the scheme's investment strategy. This gives the fund flexibility while managing the portfolio.
• Potential to earn from interest as well as price changes: The securities can generate interest income. Their market prices can also add to the fund's return if they rise.
• Can be used for temporary surplus cash: If you receive money that you don't need immediately, you may consider low duration mutual funds based on your time frame and risk appetite.
• Can be used as a holding option before investing in equity: You can use debt funds to hold money temporarily before moving it into equity funds or hybrid funds through a systematic transfer plan (STP).

• Default risk: The bond issuer may face financial problems or may fail to make the payments. The impact on the fund depends on which securities it holds and how much is invested in them.
• No promised return: A low duration fund is not the same as a fixed deposit. Your investment can earn a positive or negative return over a particular period.
• Liquidity risk: Some debt securities may not be easy to sell during difficult market conditions. This can affect the price at which the fund is able to sell them.
• Reinvestment uncertainty: When securities mature, the fund manager has to reinvest the money in a new instrument. If interest rates are lower, then the new investments may offer lower yields.
• Interest rate swings: When market interest rates change, bond prices can also change. This can affect the NAV of the fund. Low duration bonds generally have less interest rate sensitivity than longer duration funds, but the risk does not disappear.

These debt funds are similar in terms of duration, so it is easy to mix them up. Here are the main differences that separate them based on the type of securities they hold and other factors:

The best low duration mutual funds aren't the ones with the highest returns recently. Always check whether the fund fits your own needs. Considering the following factors can help:

• Scan the portfolio holdings: Check what the fund has actually invested in. This can tell you more about its risk than the category name alone.
• Evaluate the credit quality: See the ratings and types of issuers in the portfolio. Higher-rated securities can have lower credit risk, although no credit rating guarantees that a bond cannot default.
• Look at the duration: This category of funds allows a 6-12 month Macaulay duration. A fund at the higher end may respond differently to interest-rate changes than one closer to the lower end.
• Compare performance over different periods: Don't make a decision based only on the latest one-year return. Look at how the fund behaved when interest rates and market conditions changed.
• Check the expense ratio: Costs come out of the fund's assets. When comparing similar funds, a lower expense ratio can be useful, provided the other factors also make sense.

Remember, the best low duration funds for you are the ones that match your time frame and comfort with risk. If you need money very soon, you can consider overnight funds or liquid funds. For a slightly longer duration, short duration funds may be worth exploring.

To start a SIP in low duration mutual funds, download the Millions app on your smartphone and create a free account. Then follow a few simple steps:

• Open the Millions app and head to the mutual funds (MF) section.
• Explore the curated list of schemes and select the low duration fund that matches your timeline.
• Hit 'SIP' and pick your investment pace (daily, weekly or monthly).
• Select the SIP debit date, enter your starting amount and authorise the first payment.

Done! Setting up a SIP is that simple. You don't need to wait until you have a big bank balance to start investing. A regular SIP can help you gradually invest while you learn how debt funds work. As your goals change, you can explore other schemes such as liquid funds, short-duration funds or equity funds and build a portfolio that matches your needs.